What Are the Causes?

In the 1990s, during a period of unprecedented stock market growth, public pension debt was nearly nonexistent. Plans across the country were fully-funded—or close to it—and were earning double-digit returns on their investments.

The Facts

Politicians Made Oversized Promises

Policymakers awarded a series of benefit increases to public employees without a credible plan to pay for them.

Governments Failed to Follow Through

As the debt grew, governments made insufficient pension payments and instead bet on increasingly risky investments.

Policymakers Are Kicking the Can Down the Road

Governments continue to push debt into the future, which will cost taxpayers and workers much more over time.

Governments acted as though the historic gains of the 1990s would continue forever and awarded large benefit enhancements to public employees that some politicians claimed could be paid for at no additional cost to taxpayers. These politicians failed to plan for the inevitable economic downturn and told workers and taxpayers that the plans could cover the promises simply by using the money generated by investments—a mistake that would prove to be How we did get here.Finaldisastrous over the next decade.

By the early 2000s, governments were on the hook for retirement promises that were much larger than ever before. When the dot-com bubble burst between 2000 and 2001, returns fell far short of their expectations, and governments quickly found themselves in trouble. Facing significant budgetary challenges and ballooning pension bills, some governments simply did not make their payments, while others underestimated their retirement promises and set contribution levels too low to cover the true cost of workers’ benefits. Their problems grew worse when the mortgage crisis led to the Great Recession in 2008, and investment returns dropped yet again—leaving many cities and states struggling to pay more into the pension systems in order to make up the difference.

Since then, pension plan managers have tried to compensate for the growing debt by doubling their investments in risky, difficult-to-value assets such as real estate, private equity, and hedge funds. Although these bets have paid off in some years, earnings have been well below what the plans anticipated during many others. Now, after years of underfunding and lower-than-expected investment returns, pension debt has hit record highs. Despite the increasing threat, many governments have not done enough to address the problem. Instead, politicians have taken advantage of lax accounting rules to hide the true extent of the pension debt and continue to kick the can further down the road. It’s clear where these decisions will lead. Paying less today will put cities and states in a precarious position for years to come and will only cost workers and taxpayers much more in the future.

An In-Depth Look

Chicago: A Cautionary Tale

Chicago: A Cautionary Tale

Chicago provides an important case study as to how debt can rapidly increase if a city fails to make responsible pension payments. Like many other local governments, Chicago enhanced retirement benefits for public workers in the 1990s. Yet rather than pay more into the system to cover the cost of benefit increases, the city contributed almost nothing to its plans in 2001 and 2002, putting the plans and workers’ benefits at significant financial risk.

Traditional Defined Benefit Plans Are Hard to Manage

Traditional Defined Benefit Plans Are Hard to Manage

There are several aspects of traditional Defined Benefit pension plans that promote poor fiscal management practices. First, these plans require governments and plan managers to make a number of complex calculations about demographic and market trends. Even small errors in a government’s estimate of these variables can lead to significant funding problems down the road.

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What Is the Impact?

How Do We Fix It?

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