With Labor Day approaching, most workers will have the day off and some extra time to reflect, maybe even think about retirement. Many Americans are depending on pensions for their retirement, but the lack of funds from state and local governments has led to a pension crisis. You may be thinking: “I don’t have a pension, so this doesn’t affect me.” But the pension crisis will affect you, particularly your children and grandchildren, most noticeably through higher taxes. Whether or not you have been promised a pension, here are some things you should know:
1. Three-quarters of public-sector workers have a pension plan.
According to the Pension Rights Center, seventy-four percent of state and local government workers have a pension plan, meaning there are about 14 million workers who anticipate receiving a pension when they retire. This doesn’t take into account those who are already retired and currently receiving their pensions.
2. Private-sector pensions changed to defined contribution plans, while public pensions plans have largely stayed defined benefit plans.
Defined contribution plans are funded by the employee, the employer, or both. Employees and employers make regular contributions to the plan, similar to a 401(k) or 403(b). Defined benefit plans also are funded by the employee, the employer, or both. These are pension plans where the amount is calculated by a number of factors, including length of employment and salary history. Private-sector defined benefit plans declined from 88 percent to 33 percent of total plans between 1975 and 2005, while public-sector defined benefit plans declined from 98 percent to 92 percent.
3. Public-sector pensions typically pay out significantly more than private-sector pensions.
In New York State, a public-sector retiree receives, on average, nearly twice the amount in annual pension payouts than their private-sector counterparts ($27,600 vs. $13,100). In Lake County, Ill., homeowners continue to see increases in their property tax bills to not only fund local schools, but also to shore up municipal, police and fire pension funds. The average annual pension for retired government workers in Lake County is about $95,700.
4. It is getting a lot worse, very quickly.
Unfunded pension debt among the 50 states increased by $2 billion in 2017 compared to the previous year, according to TIA’s analysis of the states’ annual financial reports. Unfunded pension liabilities have continued to increase in a majority of states. For states in which unfunded pension debt decreased, it only has been by a marginal amount. Illinois’, New Jersey’s and California’s unfunded pension liabilities have all exceeded $100 billion.
5. Any solutions should include truthful, timely and transparent financial reporting.
The retirement benefit crisis now blooming in our state and local governments didn’t just come out of the blue. It has been building for decades, in part because budget and financial report accounting were whistling past the graveyard. Budgets have been based on deceptive cash-based accounting principles, allowing government servants to distribute non-cash compensation like pension and retiree health care benefits without recognizing the costs up front. Governments even included cash anticipated from future borrowing as a form of revenue. Going forward, any possible solution must include more truthful government reporting to help secure the accountability of government leaders.
To see how your state is handing pensions, check out State Data Lab’s pension database.