State Pension Shortfall Portends Tax Hikes or Spending Cuts

A new report issued by the Pew Center on the States indicates that US state pensions plans are collectively underfunded on a massive scale.

"U.S. states face a total shortfall of at least $1 trillion in their funds for employees' pensions and retirement benefits, and their financial problems are quickly mounting."

In a nutshell, US states have dramatically over promised benefits to their employees over the years, and this deficit provides that evidence.

In addition, the Pew report only analyzed data through the summer of 2008, so it's possible the deficit is worse at this point (although the stock market rally over the past 12 months potentially helped).

"Because the analysis did not encompass the final six months of calendar year 2008 -- most states' fiscal year's end during the summer -- it does not include the market downturn that devastated many funds' investment portfolios."

States are obviously at a crossroads with this issue. They know full well that the pension plans are not going to be able to invest their way out of this mess. The two logical, remaining choices are to either increase taxes on their residents as a means to compensate for the excessive benefits promised to state workers, or to re-write the defined benefit plans to provide for less future benefits to employees.

Considering that it is the rare private company that still offers pension benefits to its employees, states would be well advised to ratchet down promised future benefits as a means of correcting this deficit.