The Corner

State Budgets + Pensions = Disaster

The Daily Beast has a good summary of the fifty states’ various levels of indebtedness (note: I can’t vouch for the accuracy of the numbers). Contrary to the lack-of-tax-revenue story that states like to tell to explain the red ink in their budgets, the source of their problems is spending: During good times, they spend, and during bad times, they continue to spend. What on? State employees, for one thing — plenty of them, all very well treated. There’s a reason why the difference between state and local government employees’ compensations (including pensions) and private employees’ compensations has been making the headlines so often these days. What isn’t making the headlines enough is what will happen when the state pension crisis starts, so here’s a 23-second visual from Reason TV.

How bad is it? Using methods required for private-sector pensions — in which pension liabilities are measured according to likelihood of payment rather than the return expected on pension assets — my colleague Eileen Norcross and AEI’s Andrew Biggs find that total liabilities amount to $5.2 trillion and the unfunded liability amounts to $3 trillion.

The solution: switch from defined-benefit retirement plans to 401(k)-style defined-contribution plans.

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