Public Sector Pensions: Overcommitted and Underfunded

The Burden of Pensions on States


Coming up with bigger contributions to pension funds will require states to make difficult choices about the size of their work forces, their commitment to public services and the viability of their employee benefits, which are often said to be irreversible and protected by state constitutions.

“The amount they have to be contributing could potentially be two to three times as much as they’re contributing now,” said Joshua Rauh, an associate professor of finance at Northwestern University, who has been challenging the way most cities and states measure their pension promises. “If you don’t want to count on the stock market to pay for all this, this is what you’re going to have to contribute.”

Mr. Rauh and a number of other analysts say the states’ biggest problem has been a failure to understand how much benefits will really cost. Instead of the states’ models, these analysts have come up with alternatives that more closely approximate those used by insurance companies.

Unlike recalcitrant states like New Jersey and Illinois, Wisconsin has been setting aside money every year for its fund. It has also been thinking of lowering its reliance on stocks, to reduce its exposure to bear markets.

The issue is whether it has been setting aside anywhere near enough, given the magnitude of its promises to workers.

Comment: Not just a Wisconsin problem

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