Potential pension ‘meltdown’ poses serious threat to states

Pension liabilities exceeded funding by nearly $7 trillion in 2022, with individual states taking on debt to fund their programs, putting them in an increasingly dangerous situation, according to a new report from the American Legislative Exchange Council (ALEC).

Across all 50 states, there was a collective $6.96 trillion in liabilities for public pensions that were unfunded, meaning the cost disbursed in pensions was higher than the amount collected, averaging almost $21,000 in unfunded liabilities per person, according to ALEC’s Unaccountable and Unaffordable report. California, Hawaii, Illinois and Alaska all exceeded $35,000 in liabilities per capita, while Tennessee and Indiana were the only states below $10,000 per capita.

“Understanding our pension crisis is difficult, but thankfully this report charts a path for legislators to permanently solve this growing problem,” Lisa Nelson, ALEC CEO, said in a press release. “Absent a fix, the fiscal meltdown of state pension funds threatens to leave American taxpayers on the hook for trillions of dollars in unfunded liabilities.”

Most state pensions receive funding from current employee contributions and employers through tax revenue, and then they use that money to pay retired workers a fixed monthly payment, with the states taking on debt to cover the difference, according to ALEC. Funding pension obligations with debt kicks the issue down the road, leaving future taxpayers to pick up the bill.

Large states were the biggest contributors to the overall amount of unfunded liabilities, with California accounting for $1.4 trillion, Texas accounting for $437 billion and New York accounting for $368 billion, according to ALEC. Illinois had the second-highest unfunded liabilities at $468 billion.

State governments are bound by contract and state constitutional law to make pension payments even if economic conditions change, according to ALEC. The total liabilities decreased by $1.32 trillion since the last version of the report covering 2021.

“When it comes to public pensions, keeping the promises made to state workers and retirees is critical,” Jonathan Williams, chief economist and executive vice president of policy at ALEC, said in the press release. “Without major reforms — such as switching to defined contribution plans — pension promises will be harder to keep, and taxpayers will be forced to bail out unfunded pension plans at great personal expense.”

The U.S. is facing a debt deluge, reaching $33 trillion in national debt for the first time on Monday, with $26 trillion being held by the public. The national debt has increased by $5 trillion during the Biden administration.

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