Retirement disaster

America is facing a looming financial disaster because of under-funded pension plans for public employees — the ticking time bombs left over from the financial collapse of 2008. Chances are this could hit you and me right in the billfold some time soon, unless the state takes action.

Normally, I would oppose any tinkering with state pensions. Those generous benefits are the sweeteners that help keep people – school teachers, for instance – in lower-paying jobs. I also would oppose anything to keep retired public workers from coming back to work, collecting pensions plus a smaller salary.
But unless the state makes tough economic decisions now, disaster looms.
This morning I met with state Sen. Dan Liljenquist, R-Bountiful. He compared the 2008 disaster to a chemical spill. First you have to contain the mess, then you have to clean it up. We’re containing right now. The cleanup will be the hard part.
In 2008, the state retirement system had budgeted for a 7.75 percent return on its investments, based on recent performance. Instead, it experienced a 22.3 percent loss. That left a $6.5 billion hole. Markets rebounded in 2009, but that only covered the fund’s growth for that year, plus some of the interest the state had planned to receive on the $6.5 billion it lost.
Here’s the problem: The state would need returns in the double-digits each year for the next 20 years to make up the loss. The only other alternative under the current system is to increase the state’s contribution to the fund each year — that means more money from your pocket, one way or the other. Or, it means hiring about 8,000 fewer teachers over the next 25 years.
Read the two bills Liljenquist is sponsoring — SB43, and SB63. These would end the practice of retiring and coming back to work, and would reduce pensions for all new employees (as of July 1, 2011) to a contribution of 8 percent of their salary per year into a 401K type fund or a combination of that and a defined benefit plan.
Not surprisingly, public employees are hopping mad.
But Utah isn’t the only state dealing with this — it just happens to be the state with the best-managed retirement system in the country. That means virtually every other state is in crisis.
Here’s a good report on the scope of the crisis. Here’s one on Pennsylvania’s experiences.
Liljenquist believes his plan could make the system solvent in the long run. After a few years, it would be able to withstand another 2008-like implosion. No one from the public sector seems to be able to propose a different solution. They often note that Utah’s system is well-funded, but that will drop significantly by 2015, which likely would affect the state’s bond rating.
But even if Utah fixes its problem, states like California have problems so deep they could end up pulling down investment markets and dragging Utah with them. That’s a cheery thought.
What type of retirement plan do you have? Do you think state pensions should be cut, or should Utah raise taxes to make up the difference?