Governments are scrambling to keep up with rising retirement costs, and the problem is likely to only get worse, given that politicians continue to underfund public pension plans. As pension debt has grown, actuarially determined pension contributions have increased from 6.7 percent of payroll in 2001 to 18.6 percent of payroll in 2016. About 70 percent of governments’ pension payments go toward covering the debt, while just 30 percent is used to cover the benefits earned by current workers. Yet, it’s often workers themselves who end up paying the price for decades of government mismanagement. Cities and states have cut a half-million positions since the Great Recession in 2008, leaving fewer teachers, police officers, firefighters, and public employees in our communities today. Governments have also cut benefits for the employees who remain and their wages have stagnated—undermining these workers’ ability to maintain their standard of living and save for retirement.
The impact of the public pension debt extends beyond public workers and carries consequences for taxpayers and society as a whole. Despite the fact that cities and states are allocating more money to their pension systems each year, pension costs continue to increase. As a greater share of state and local budgets is required to cover the cost of pension obligations, governments find themselves with less money for police and fire departments, education, infrastructure, parks, and a variety of other programs and services. Communities are facing difficult questions: Should they implement further cuts to pension benefits? Raise taxes? Or make budget reductions in other important areas?
There are no easy answers. However, as cities like Prichard, Alabama, and Central Falls, Rhode Island, have learned, ignoring the problem will only make it worse. In Prichard, for example, the problem became so bad that the pension fund ran out of money and the city stopped paying retirees’ benefits altogether for nearly two years. Central Falls, a city of less than 20,000 people, found itself in similarly dire straits after racking up $80 million in pension debt. Officials were forced to cut benefits for retirees by up to 55 percent. While these jurisdictions demonstrate cases of extreme fiscal mismanagement, politicians across the country should take note of the serious consequences of inaction and engage their communities in developing comprehensive plans to address their pension problems before it’s too late. Everyone—workers, taxpayers, and governments—must work together to find a solution.