These 13 States Owe Workers $796 Billion

By InvestingAnswers Staff
May 10, 2011

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The funny thing about pensions is, the promises are easy to make but difficult to execute.

And after a series of big promises and bad investing decisions, 31 of 50 state pensions are grossly underfunded.

That's bad news for some people, or in some cases, all people living in that state. When pension assets don't throw off enough income to pay retirees, the shortfall must come from working taxpayers (via higher taxes) or future generations (via borrowing). The one final alternative is to cut pensioners' benefits.

A recent study by the Pew Center on the States, "The Trillion Dollar Gap Grows Wider," a nonpartisan think-tank in Washington D.C., reports a $1.26 trillion shortfall between the money promised to retired public employees and the funding available to cover these costs. Pensions have a $660 billion gap, and retiree health benefits have a $604 billion shortfall.

According to the actuarial rule-of-thumb, a pension is considered healthy if it has a funding level of at least 80% of its liability. But with stagnant job growth and floundering housing starts throughout much of the country, state governments have been plagued by investment losses, unemployment liabilities and low tax revenue. Nineteen states have pensions that are less than 70% funded, and 13 of those are falling even further behind by not making at least 100% of the contributions they need to make to keep up with pension costs.

So what does this mean for taxpayers in these states? The growing bill will almost certainly have significant consequences -- higher taxes, lower expenditures on public services, layoffs of state employees and lower state bond ratings.

The following 19 states pensions were less than 70% funded in 2009 (the most recent data available), and the 13 states highlighted in yellow contributed less than the "actuarial required contribution" necessary to meet pension obligations -- meaning they're falling even further behind.

As these burdens begin to spiral even further out of control, will bankruptcy at the state level be the next shockwave to hit the U.S. economy?

State Pensions Underfunded