By Jay Heflin - 08/20/10 01:12 PM EDT
Taxpayers could be on the hook for a $3 trillion bailout of state pension plans, according to a new report from the Kellogg Graduate School of Management at Northwestern University.
The report examined the current value of liabilities in state pensions, then — through economic modeling — attempted to lower those liabilities by making cost-of-living adjustments, increasing retirement ages or instituting buyouts for early retirements.
The modifications had little effect. Report findings suggest that pension programs in as many as 31 states are headed for financial disaster by 2030 and that taxpayers will bear a large share of the financial burden in unfunded legacy liabilities associated with those plans.
"Even if states uniformly eliminated generous early retirement deals and raised the retirement age to 74, the unfunded liability for promises already made would still be more than $1 trillion," said Kellogg associate professor Joshua Rauh, in prepared remarks. "The feasible measures that could be proposed to make public employees bear the costs do not have sufficient power to eliminate these unfunded liabilities."
Rauh said current pension policies have unfunded liabilities of around $3 trillion. Moderate changes to those policies that would affect current workers and retirees would likely be very controversial and a hot-button issue politically, but have a negligible affect on liabilities.
In other words, radical changes that would be outside the realm of what is politically plausible is needed to ensure the solvency of many state pensions.
"The bottom line is that even much more drastic versions of the policy actions currently being discussed don't come close to solving the problem, since so much of the pension debt is owed to workers who have already retired," Rauh said, adding that "more than half of the liability is owed to people who have already retired, and the idea of large outright cuts to current retirees is not under serious consideration."
"Assuming states don't start defaulting on their bonds and other debts, it seems that taxpayers will be footing most of the multi-trillion dollar bill for the pension promises that states have already made to workers," he added.