An abandoned neighborhood in Detroit, MI.
America is facing a fiscal crisis and no one is talking about it. Pension reform has snuck under the public’s radar, even though it poses the single greatest threat to municipal and state governments. Pensions are a system by which government employees—teachers, firefighters, prison guards, etc.—receive regular payments after retirement, having contributed to an investment fund throughout their working life. With more and more pension debt accumulating every year, governments are contractually obligated to pay retirees before they fund critical services like higher education and infrastructure.
Currently, pensions are dramatically underfunded; in 2016 public pension debt jumped by $434 billion to a total of $3.85 trillion, which is more than 20% of American GDP. The scale of municipal pension debt can be massive; Detroit’s bankruptcy is directly attributable to the city’s huge amount of unfunded pension liability. Conservative estimates of the city’s debt place it around $3 billion. If municipalities and states don’t enact concrete pension reform now, debt will continue to skyrocket and be laid at the feet of the next generation. Creative yet tough solutions exist and will require political courage from local and state politicians around the country.
Pensions themselves are complicated, lacking sexy taglines like “free college” or “build that wall.” Most government pensions are called defined-benefit plans. This means that the pension will promise a set return, usually around 7-8 percent. If the pension doesn’t meet that promise, the government is obligated to pay the difference from their general fund. This becomes an issue when the average returns from pension funds are 5-6 percent.
Before its bankruptcy, Detroit had 12,000 public employees, each of whom was owed money from their floundering pensions. There are 16.2 million public workers employed by state and local governments across the country; not only are those 16.2 million people owed pension returns, but their jobs are at risk if municipalities go bankrupt. This crisis can get much worse. Next in line is California, the United States’ largest employer of state workers. The state’s budget, as researched by Stanford professor David Crane, tells a revealing story. In the past six years, California’s general fund has increased by 28 percent, but the share for discretionary spending (University of California, parks, courts, etc.) has dropped by 43 percent. The remaining funds from this difference have gone towards a 99 percent increase in pension funding.
Unfunded liabilities, which are contractually owed by the state, force out discretionary funding for programs like higher education. Declining to tackle this issue now only places it on the shoulders next generation, who will be burdened with exponentially more debt. Not all is lost though, because some politicians have the courage to stand up to even the most powerful interest groups.
Rhode Island Governor Gina Raimondo has distinguished herself by tackling pension reform while bearing the brunt of public blow back. In 2011, Raimondo, then the state’s treasurer, assessed the unfunded pension liability at roughly $7 billion, meaning the state had met less than 50 percent of its obligations. Today the state’s pension system is on its way to $0 of unfunded liability.
Of course, the state has faced challenges in this transition: public retirees have stopped receiving annual increases in payments, and current workers have been forced to move to a defined-contribution plan, in which they contribute, rather than receive, a set amount. The governor’s decisions are being challenged in court for what opponents say is a violation of contractual law, but as it stands, Rhode Island is on track to fully fund its pensions. If these actions had not been taken, exponentially increasing debt would be crippling the state government.
Although pensions seem like an archaic subject unlikely to excite voters, politicians must tackle them head-on. If not, debt will grow each year until it becomes insurmountable even by the largest tax increases and harshest benefit cuts. Pension reform may not be sexy, but it is critically necessary.
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