Thursday, May 20, 2010

State Pensions Now Federal Issue as Bailouts May Top $1 Trillion

IMO, the feds may end up taking all of our pensions, 401k's, IRA's, and dump them into social security. How would you like that?

U.S. states reportedly face a funding gap of at least $1 trillion for the retirement benefits they have promised teachers, firefighters and other public sector employees.

With financial year 2011 less than six weeks away, Illinois, for example, faces unfunded liabilities of about $78 billion, the biggest pension hole in the United States, and contributions of more than $4 billion for 2011, the largest single element of its $13 billion budget deficit, the Financial Times reports.

Illinois is the poster child of unfunded pensions in the United States. But state retirement systems could become a national concern, the Times reported, citing new research.

Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade, the Times reported.

By 2030, as many as 31 states may not have the money to pay pensions.

And, if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bailout that could potentially cost more than $1 trillion, he says.

“It is more than a local problem,” Rauh told the Times. “The federal government could be on the hook.”

Robert Megna, New York’s budget director, said his state had had to make “tough choices” to keep funding its pensions despite budget shortfalls over the past few years.

On March 31, the state made a nearly $1 billion payment for the last fiscal year.

“We had to make cuts: education, healthcare, local government support and not-for-profit providers,” Megna said of the last year’s budget process.

This year, a dozen states have enacted pension reforms more substantial than the minor ones of the past, reports.

Among these are Illinois, which raised its retirement age to 67 from 62 for new hires, Wyoming, which began asking current state workers to contribute to their retirement, and Utah, which closed its defined benefit plan to new workers.

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