A new study on retirement benefits examines the revenue demands of the pension promises to public employees by calculating the average contribution that American households will have to contribute to fulfill such costs. According to the Kellogg School of Management at Northwestern University and the Simon School of Business, each American household on average will have to pony up $1,398 per year to fulfill public pension promises. The authors posit that if newly-hired public workers were switched to defined-contribution plans, then the per-household annual contribution would only be reduced by about $175. The study also looks at calculations of the increases in contributions that would be required to achieve fully funded pension systems. Here are some highlights from the report:
- Government contributions to state and local pension systems must rise to 14.2% of own revenue to achieve fully funded systems in 30 years. Average contributions would have to rise to 40.7% of payroll to achieve these goals, corresponding to an increase of 24.3% of payroll.
- In thirteen states, the necessary immediate increase is more than $1,500 per household per year, and in five states they are more than $2,000 per household per year.
- Assigning new hires to DC plans is known as a “soft freeze” of the DB plan. Our analysis shows that soft freezes have moderate revenue-saving effects. The required increases decline from $1,398 to $1,223 per household
- Taxpayers may leave the states that are the most burdened by the legacy liabilities and look for places with lower taxes and better public services.This sorting is likely to further increase the burden on states with the largest unfunded liabilities. Third, in states where the burden is large relative to revenue, there is likely an increased danger of a municipal debt crisis if the holders of public debt lose confidence in the ability or willingness of taxpayers in the state to foot the bill for legacy liabilities.
For California, the authors found that between 2008 and 2009, employee contributions grew by 7.2% for the funds covered in that study (CalPERS, CalSTRS, and the University of California Retirement Plan), while government contributions shrank by 3.4%, so that total contributions shrank by 0.1%. Based on these figures, it was calculated that in 2009, there were $6.47 billion of employee contributions to state-sponsored plans, $10.95 billion of government contributions to state-sponsored plans, $1.87 billion of employee contributions to locally-sponsored plans, and $4.28 billion of government contributions to locally-sponsored plans. Read the full study here.