State and local governments are on the hook to pay retirement benefits to public employees such as teachers and public safety officials. However, governments generally do not set aside enough money to pay for these promises down the road. If the pensions are underfunded, then future taxpayers will have to pay twice for services rendered: once for the salaries of new and current public employees and again for the retirement pensions of the public employees that worked for the city or state in the past. This is increasingly happening now, as pension contributions are among the fastest rising budget items for states and cities.
While state and local governments claim to run balanced budgets, [Joshua] Rauh’s research has shown that in fact they do not. They contribute far less than would be necessary to stabilize the explosive growth of pension promises, relying on flawed measurement standards that understate both the amount of pensions owed to public employees and the costs of maintaining these plans. The result is that citizens are experiencing higher taxes and fees while public services themselves get squeezed.
Rauh’s new figures show that under market valuation principles, the total unfunded pension debt nationwide to public employees rose between 2015 and 2017 from $3.846 trillion to $4.145 trillion. More important, in FY2017, state and local governments contributed $185 billion to pension payments, or 8.0 percent of every dollar they raised in revenue, up dramatically from 4.9 percent in FY2015. However, this amount still proved insufficient, as the true annual cost of keeping pension liabilities from rising would be approximately $338 billion. This “true cost” figure amounts to over 14 percent of all the revenue generated by state and local governments, or a whopping 21 percent of their tax revenue.
- Read the full press release for the 2019 update of “Hidden Debt, Hidden Deficits” here.
- Read the key numbers from the 2019 update of “Hidden Debt, Hidden Deficits” here.
- Read the full methodology behind this analysis in the 2017 update of “Hidden Debt, Hidden Deficits” here.
This article republishes a selection of the press release for “Hidden Debt, Hidden Deficits: 2019 Update” by Joshua Rauh, a research project published by Hoover Institute in June 2019.