Unfunded Retirement Benefits

• State and local goverments could be $1 trillion behind on pension payments .a couple of seniors image by Tomasz Parys from Fotolia.com
  
  Unfunded retirement benefits, basically benefits paid to retired employees out of current revenue, could be responsible for one of the biggest looming government fiscal crises in the United States, according to several published reports. Most of that shortfall comes from state and local governments, whose generous retirement benefits are often completely or partially unfunded. Moreover, private employers' retirement obligations could also become the obligation of the federal government, which insures them.
  
  

Background

• An unfunded, or pay-as-you-go, plan is a retirement plan under which benefits are paid out of revenues and no money is set aside by the employer to pay out future liabilities. The Employer Retirement Income Security Act of 1974 (ERISA), prompted in part by several massive company bankruptcies that put thousands of pensions in jeopardy, put in place several restrictions on unfunded benefits provided by private employers. It also created a federal insurance fund to cover private employee benefits if a company defaulted on its obligations. State, local and federal governments, however, were exempt from ERISA restrictions. Most public pensions are funded by a mix of annual contributions from employees and employers and the investment earnings from those contributions, according to the federal Governmental Accountability Office (GAO). Those pensions are considered unfunded when the value of the assets is less than that of the accrued liabilities.
  
  

State and Local Pension Gap

• Several widely publicized reports have called attention to the growing government deficit caused by unfunded or under-funded pensions. One 2010 report published by the Pew Center on the States found a $1 trillion dollar gap in benefits promised by state and local retirement programs and the money they had on hand to pay for them. The report found that states had been decreasing the amount of money they set aside for benefits since the start of the decade, and those liabilities were projected to grow. It also found that only four states had fully funded retirement plans in 2008, down from slightly more than half in 2000. A 2008 GAO report found that just over half of the states, or 58 percent, were funded to the level it cited as sound, compared to about 90 percent two years earlier, although that report concluded that the funded status of state and local government benefits overall was relatively sound.
  
  

Federal Liability for Unfunded Private Plans

• Taxpayers could also be on the hook for private employers' insurance shortfalls, according to a 2006 report published by the National Center for Policy Analysis. For most of the post-war period, until ERISA was passed, employers were not required to fund their pension plans, meaning the pensions were only as strong as the companies that supported them. Even after ERISA, companies are allowed to offer unfunded plans that meet certain exemptions. To protect employees from losing their promised benefits if their companies declared bankruptcy, ERISA created the Pension Benefit Guarantee Corporation (PBGC), a public entity that insures pension benefits from required contributions from companies that offer defined benefit pension plans. The National Center for Policy Analysis report found, however, that the PBGC was badly underfunded and, in 2004, it paid out twice as much in benefits as the contributions it collected. It recommended tightening rules for what constitutes a fully funded plan, absolving government pension insurance and requiring companies to fully disclose their pension liabilities to employees and shareholders, among other reforms.
  
  

Outlook

• The GAO report concluded that alarming predictions of future expenses were a natural result of pay-as-you-go plans. Its recommendations were unequivocal: "State and local governments need to find strategies for dealing with unfunded liabilities," it read, "And such strategies will take time, will require difficult choices, and could be affected by changes in national health policy."
  
  Likewise, the Pew report said lawmakers' response to reported shortfalls in 2010 was promising, with 15 states passing reforms in 2009, and more expected to follow. Most states have legal restrictions on changes to existing employee benefits, so reforms included increased contributions required for new and future employees, lowering benefits and increasing retirement ages for new employees and introducing policies geared at keeping up with funding requirements.