Between what states promised to pay for employees’ pensions and other retirement benefits and what they actually set aside is at least a $1.26 trillion gap, a 26 percent increase in one year, according to a recent report by the Pew Center on the States.
Thirty-one states were below the 80 percent funded threshold for a well-funded pension system in fiscal 2009, the latest year for which data is available. This is an increase of 22 states from a year earlier. At 51 percent, Illinois had the lowest pension funding level. New York, at 101 percent, has the highest, followed by Wisconsin at 100 percent and Washington at 99 percent.
State pension plans represented slightly more than half of this budget shortfall, with $2.28 trillion set aside to cover $2.94 in long-term liabilities—a $660 billion gap. Retiree health care and other benefits accounted for the remaining $607 billion, with $31 billion in assets to pay for $638 billion in liabilities. Pension funding shortfalls surpassed funding gaps for retiree health care and other benefits for the first time since states began reporting liabilities for the latter in fiscal year 2006, the report said.
The 2008 economic collapse severely impacted pension funds’ investments, while state and local governments faced unprecedented budget crises that limited their ability to contribute to those funds. They contributed $73 billion—or 62 percent of the total annual bill—instead of the recommended $117 billion that would have allowed them to build up enough assets to fully fund their long-term promises. This 2009 payment represents a five percentage point decline from the previous fiscal year’s contribution, when states set aside just under $72 billion toward a $108 billion requirement.
For public and private sector employees alike, being able to count on expected retirement income is a primary concern, A 2010 study of Mass Affluent investors with a net worth between $100,000 and $1 million (not including primary residence) found that 18 percent overall expect pension plans to provide their primary source of retirement income, while 13 percent will be relying on retirement distributions. But 30 percent of investors ages 54 and under had seen their employers reduce contributions to their retirement accounts.