Report: Economic Downturn Widened Pension Funding Gap

Newly released data show how the Great Recession exacerbated states' ability to fund pensions.
by | April 26, 2011 AT 8:30 AM

For the first time since liability reporting began in 2006, it's not health-care spending for retirees that's causing the most worry — it's their unfunded pensions, according to a Pew Center on the States report released today.

"Pension funding levels are stabilizing after the steep investment losses caused by the 2008 Wall Street collapse, but the legacy of the recession will be evident on pension fund balance sheets for some time, particularly in states that spread out their investment losses over a number of years," said the Center's managing director, Susan Urahn.

In 2009, at the height of the recession, state pension plans accounted for more than half of the $660 billion gap between promised retirement benefits and actual money set aside for those promises. That gap represents a 26 percent increase over the previous fiscal year.

Overall, states funded just under 78 percent of their pension systems — 2 percent below the recommended minimum funding level of 80 percent. Thirty-one states failed to meet this mark — a significant drop from the previous year, when only 22 states didn't put enough into pension plans.

Most states' failure to fully fund their pension plans was a result of lost tax revenue, which experts don't foresee making any sudden turnarounds. That may force states to figure out better ways to fund their retirement benefits.

"States with significantly underfunded retirement systems cannot sit back and hope the stock market will bail them out, especially as the baby boomers begin to retire," said Urahn.

According to the report, 19 states either reduced their pension plan benefits or required retirees to contribute more. For example, Missouri raised its retirement age for new employees and required them to contribute more to their pensions, saving taxpayers $660 million over ten years.

What states really need to do, said Urahn, is start contributing the full amount to retirement benefit funds because, she said, "like a credit card holder who makes little or no monthly payments while adding new purchases, states have built up a substantial balance that requires bigger dollar amounts to pay off with each passing year."

In addition, Urahn said states need to reevaluate the size and management of their liabilities and decide how much they can afford to set aside for retirement benefits without compromising funding for education, infrastructure and human services.

Pew adopted each state's assumptions of life expectancy, retirement dates, and — most controversially — investment return rates, which average around 8 percent.

"The stakes in this debate are high, because when a state lowers its investment return assumption, its projected liability and its annual contributions in future years go up dramatically," Urahn said, citing Rhode Island's recent decision to lower its rate from 8.25 to 7.5, resulting in a projected $1.5 billion increase in unfunded pension liabilities.

Fiscal year 2010 statistics were only available for 16 states, so the numbers are too sparse to draw significant conclusions. But of those 16, 10 states put even less into their pension systems, while three states — Vermont, Minnesota and Idaho — added more.

The Pew report, The Widening Gap: The Great Recession's Impact on State Pension and Retiree Health Care Costs, examined 231 pension plans and 162 other retirement benefit plans for fiscal year 2009 in nearly every state. Fiscal year 2008 data was used for Hawaii and projections were used for Ohio.