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U.S. state pension funds face $1 trillion shortfall

February 19, 2010

A new report warns that U.S. states currently face a total shortfall of at least $1 trillion in their funds for employees’ pensions and retirement benefits. And the problem is rapidly worsening. [Reuters]

The New York-based Pew Center released the report, which focuses on fiscal year 2008, on Thursday.

Illinois is in the worst shape, with only 54 percent of its pension obligations funded. Analysts warned that the study was conducted before the recent economic downturn, further devastating the financial portfolios of several states.

“The funding gap will likely increase when the more than 25 percent loss states took in calendar year 2008 is factored in,” the report said.

A pension fund is considered healthy if it has a funding level equal to at least 80 percent of its liability. In fiscal 2008, 21 states were below that mark. The rate of decline has been rapid, according to the Pew report.  In fiscal 2000, fully half of the 50 states had fully funded their pension systems. However, by 2008, only New York, Wisconsin, Washington, and Florida could cover those costs.

Alaska and Arizona are the only states that have more than 50 percent of the assets needed to pay for other post-employment benefits, such as health care.

California, in particular, has more than $22 billion in unfunded liabilities in the California State Teachers’ Retirement System. However, the Pew study says that the California Public Employees’ Retirement System remains “in relatively good shape.”

Suggestions for solving the problem by Sacramento include raising the retirement age and eliminating automatic cost-of-living expenses.


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Sounds right on the money Roger. However, pulling money out of a retirement fund early usually results in a penalty by the IRS. I am sure they will wave the penalty fee because these are the god all mighty overpaid, over-benefited public employees including our pos sheriff who has been bilking the county as of late. Can’t wait till he is gone. In hell that is.


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standup, It is the state that pulled the pentention funds and spent it figuring that they could put it back later. It’s the same thing that the Feds did with everyone’s social security. The gov just can’t be trusted with the people’s savings and or investments.


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The problem with state pension funds can be traced right back to state governments. Do you know why? Simply it was an easy way for states to tap into the retirement funds to address budgetary needs. The logical question is how did they do it?


Once upon a time, pension funds were restricted to certain types of investments. These were investments in which both the interest and principal was relatively ‘safe.’ If – for example – investments were restricted to treasury bills that were paying say 2% … a $100,000 retirement fund would pay 2,000 a year. As long as no more that $2000 was required each year, the pension fund rolled along without spening principle. However, a few ‘bright guys’ pointed out that if you invested the pension in ‘other things’ that paid more, then you wouldn’t have to keep as large a cash reserve on hand. So, they found an investment that paid — say 10% — and our state fellows realized that instead of $100,000 they only needed to keep 20,000 on hand.


I am sure you see where this is going. In my little example the state then took the excess cash reserve ($80,000 in this case) and spent it. The reality is that we are talking about numbers no doubt in the billions. Now, these folks knew better and there were plenty of people who were saying not to do it… but they wanted it. It was the retirees money… and they spent it because they could.


So, if you are looking at who is to blame, you really don’t have to look father than Sacramento.


Roger Freberg


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No problem. You simply pay off the old investors – er, I mean retirees – with money collected from the new investors – er, I mean current workers. In theory this can go on forever – just ask the folks at Estate Financial or Hurst.


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Good point. In many ways it sort of looks like our whole economic system is a Ponzi Scheme.


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If anyone out there is sitting on a Government pension fund that they can collect on now is waiting till they are 65 to get the larger amount….. DONT! Cash in quick, there won’t be any left in a few years.


No wonder there are record retirements this year


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