The Corner

How the High Costs of Public-Sector Pensions Affect States’ Economic Growth

Today my colleagues and I on the labor team at the Competitive Enterprise Institute released the first installment in CEI’s new three-part series ”The High Cost of Big Labor,” which looks at the economic impact of labor policies on U.S. states, including right-to-work and collective-bargaining laws.

Using the different methodologies and research available, economist Robert Sarvis ranks the states based on the financial status of their public pension programs in “Understanding Public Pensions; A State-by-State Comparison.” His analysis shows that the severity of underfunding is clearly greater than official reports show, no matter how you calculate it, and that there is a consensus throughout all studies on which states are in the worst shape.

As my colleague Aloysius Hogan put it, “Individuals and businesses in states with underfunded pensions – or considering a move to such a state – need to understand that the piper will have to be paid eventually. Without significant reform, these debts will adversely affect individuals and business by forcing state governments to raise taxes, cut public services, or both. According to CEI’s latest ranking, states can no longer hide behind different methods for calculating pension debt, because those who are in real trouble rise to the top — these states need to enact reform now.”

Sarvis’ overall ranking shows New Mexico, Illinois, Mississippi, Kentucky, and Ohio are facing some of the biggest gaps in funding of their public-pension programs. One of the main problems, Sarvis explains, is that until recently government actuaries were allowed to use an unrealistic rate for calculating investment returns. Specifically, governments were allowed to value and report pension liabilities using a discount rate based on a wishfully high rate of return – not on the certainty of those liabilities coming due.

In other words, the castle of public-sector retirements has been built on sand.

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