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Pension expert tells why state pension bailout is a bad idea

by John Stephenson / /

Last week, I wrote about how pension funding shortfalls are leading states to take drastic measures. Now, some commentators and lawmakers are talking about a Congressional bailout of state and local government pensions. But some experts are speaking out against a bailout because of the huge costs taxpayers will face should such a proposal be enacted.

David C. John, the leading pension analyst at the Heritage Foundation and one of the top retirement security experts in Washington, D.C., says that the gap between what states have promised to pay and what resources they have available to pay far exceeds previous estimates, leaving states with almost no easy options. Drawing on a recent study, John writes that "116 major pensions plans in the 50 states have assets of about $1.8 trillion to pay pension promises of between $3.6 trillion and $5.2 trillion. This leaves a gap of between $1.8 trillion and $3.4 trillion." 

Moreover, there is little the states can do to resolve this pension gap. John writes: "Increasing the retirement age by a year would reduce pension promises by only 2–4 percent; keeping future cost-of-living adjustments (COLAs) 1 percent below the actual increase in cost of living would reduce those promises by only 9 to 11 percent. Even uniformly increasing the retirement age to 74, eliminating COLAs altogether, or similar moves still leaves a total deficit of over $1 trillion." What's more, several states that have tried to modify their pensions by adjusting benefits have been sued by retirees, claiming that constitutional protections against breach of contract prevent the states from changing the pensions.

So what are the states to do? The size of the funding gap, the lack of easy options, and the constitutional limits are leading to calls for a Congressional bailout of or involvement in the states' pension crisis. But John says that this would be a terrible idea. He writes, "A federal bailout would be the worst possible outcome—even if it were accompanied by reform measures. Taxpayers in states or cities that have been responsible should not see their tax dollars used to relieve those states that have been irresponsible. States and local governments must resolve their own problems, or many will simply make cosmetic changes and then come back for another federal solution when things deteriorate again."

Congress and the states should heed John's advice. Rather than seek a bailout, states should invest their energy in finding ways to reform their pension plans.