Bailout of state pension funds on the horizon, rewarding more irresponsible behavior

You have had the privilege of paying for other people’s mortgages (and will continue to do so for many, many years); their cars, their home appliances, their health care and now you may have the joy of paying the pensions of state workers…not even the ones in your state.  A new study, Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities, says that to bail out several states the federal government may have to issue new bonds at a cost of $75 billion.  According to the study several states are in trouble now, six by 2020 and as many as thirty one by 2030, all this resulting from poor investing, bad actuarial assumptions, and mostly from overly generous benefits for state workers.

Your state taxes are paying for these pensions (along with employee contributions in most cases), but the promises are too great and the funding too little to meet the obligations.  It appears we may be headed for another bailout of irresponsible people, this time public employee unions and the state politicians who negotiate with them.   There should be no surprises in this one though as you have already bailed out GM in large part because of a similar scenario.

Whose pension am I paying for?

The pensions are not all you have to worry about, the various states have also promised incredibly generous retiree health benefits as well and they are largely unfunded but with as much as trillion dollars in liability (nobody really knows the right number but in New Jersey alone, the number is about $50 billion). 

The Wall Street Journal reports on the study which says in part: 

Other state pension funds expected to dry up by 2020: Louisiana, New Jersey, Connecticut, Indiana, Oklahoma and Hawaii. By 2030, 31 states could be in similar trouble, Rauh said in a report released Wednesday. He says the ultimate cost of a federal rescue could top $1 trillion. “This scenario could happen sooner if taxpayers flee to other states with lower taxes and higher services, if contributions are deferred or not made, or if returns are lower than expected,” said Rauh, an associate professor of finance at Northwestern’s Kellogg School of Management.

His prescription: Allow states to issue tax-subsidized pension funding bonds — similar to the Build America Bonds program — for the next 15 years if they agree to major reforms. States would need to close defined-benefit pension plans and offer new hires a defined-contribution plan as well as guaranteed access to Social Security (which only a quarter of all public workers contribute to now). The net cost to the federal government, he estimates, would be about $75 billion

Doesn’t all this make you mad, aren’t you disturbed that state workers have benefits far more generous than you do and that you and your fellow taxpayers who are struggling with your own retirement and health care costs are paying for the irresponsible behavior of public unions and state politicians?   Given this is nothing new and people have been warned for years of the problem, I guess it doesn’t matter much.


  1. Historically city, state, and federal governments have paid their employees by salary on a twice monthly basis. This is two fewer paychecks a year than private sector employees usually paid on a bi-weekly basis. The public sector employees do not usually recieve bonuses, with the exception of military re-enlistment bonuses which are only paid to certain specialties and aren’t the same for all of those. Public sector employees, at least at the Federal level, do not get paid overtime. And while many public employees are subject to being shot at, burned alive, bombed, etc, private sector employees are not unless they are receiving very serious money (Blackwater Mercenaries, etc).

    The various government entities, knowing they had undertaken these obligations, should have financed those obligations with bond measures, small tax increases at the time, or some other means.

    Private sector employees are, on average, much better paid than public sector employees.

    The big point to make here is that the public employee is not the one who acted irresponsibly, and correcting the problem is the responsibility of government who took on the obligation, not the public employee.

    Trust me, we would not have all-volunteer Military, Police, or Fire-Departments at their current compensation levels and inherent risks without these benefit packages.

    Private sector gets theirs up front. Public sector, if they live long enough, get theirs on the back end.


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