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States sinking in pension plan debt: Column

Nathan Benefield
How much is in your 401(k)?
  • The combined unfunded liability of state pension systems at %242.5 trillion.
  • Shifting to a 401%28k%29-style plan gets politics out of pensions.
  • States have proven that this model works.

Taxpayers nationwide are staring down a swelling tidal wave of government pension debt. Recent estimates put the combined unfunded liability of state pension systems at $2.5 trillion. Nearly every state has tried to reduce these unsustainable costs, but most reforms have proven to be baby steps or worse -- leaving future generations up to their necks in waves of debt.

One inescapable fact remains: Without meaningful reform, paying down these liabilities would cost the average American household an additional $1,385 in taxes every year for the next three decades.

Not all state reforms have merely kicked the can down the road, however. Some states have pursued -- or are pursuing -- a shift to a defined contribution plan like the 401(k), which most private companies already offer. These states are leading the way in government pension reform. By simply moving to a 401(k)-style plan, states will put themselves on surer financial footing and protect taxpayers from the political games that have created this funding crisis.

Consider Pennsylvania: The Keystone State's ongoing pension reform debate is a microcosm of the larger national pension problem. Today, the state faces a $47 billion unfunded pension liability -- that's $9,000 owed per household. And this debt tsunami is picking up speed; A 2010 law artificially caps pension contributions and hides stock market losses for a decade.By 2018, the state pension debt will rise to $65 billion, a staggering $13,000 owed by each Pennsylvania family.

Thankfully, a 401(k)-style reform proposed by Gov. Tom Corbett and several legislators would stem the rising tide of debt and turn state finances around.

Most importantly, shifting to a 401(k)-style plan gets politics out of pensions. The status quo -- defined benefit plans guaranteeing a certain annual income from retirement until death -- encourages lawmakers to grant lavish benefits in good years and avoid paying in bad years. This system makes perfect political sense, but it's sheer nonsense for the state's taxpayers. A child born in Pennsylvania today will wait 18 years to vote, but will be paying off our pension debt until age 30.

Not so with a 401(k) plan. A defined contribution model requires that the government make its payments every year. This makes costs affordable for taxpayers, predictable for governments, and current for payments so costs cannot be deferred-none of which is true under the status quo. It also gives workers ownership and transparency over their retirement.

Other states have proven that this model works. Michigan shifted state employees into a 401(k)-style defined contribution retirement plan more than 15 years ago. Since then, Michigan taxpayers have saved $2.1 to $4.3 billion thanks to lawmakers leading the way on common sense pension reform. The statealso saved $167 million from 1997 to 2010 from the lower cost of the defined-contribution plan.

Contrast this with the jaw-dropping fiscal crises threatening taxpayers elsewhere. From California to New York, states with defined benefit plans face mounting red ink that together approach a trillion dollars in unfunded liability.

Illinois' pension prognosis is perhaps the grimmest. Its pension system is drowning in an unfathomable $167 billion of debt. Government unions, however, have successfully resisted meaningful changes that would right the state's sinking financial ship-leaving the state's governor to suggest that the federal government should step in and bail out state pension systems.

Such a bailout is a cure worse than the disease. Not only would it impose massive costs on families across the country, but it would reward states for continuing to leave their retirement systems broken, eliminating the incentive to pass the reforms taxpayers need.

States must jettison the unnatural disaster that defined benefit pension plans have become. Only by shifting employees to a 401(k) model can state officials get politics out of pensions, offer a sustainable retirement for new workers, and shield taxpayers from an oncoming tidal wave of debt.

Nathan Benefield is a director of policy analysis at the Commonwealth Foundation in Harrisburg, Pa.

In addition to its own editorials, USA TODAY publishes diverse opinions from outside writers, including our Board of Contributors.

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