If you have ever wondered if public pension underfunding is relevant and plan on moving states, Warren Buffett has something to share with you: “If I were relocating into some state that had a huge unfunded pension plan I’m walking into liabilities,” he said in a recent interview with CNBC.
Defined benefit (DB) pensions for public workers have long been providing guaranteed lifetime retirement benefits, which usually have strong legal protections. Every new teacher, firefighter, or other public worker hired adds to a state’s pension liability, but it’s the unfunded portion of these liabilities that is of growing concern.
In fact, underfunding of American public pensions might be anywhere from $1.6 trillion to $5.96 trillion, depending on the methods used to discount the liability. Due mainly to historically underperforming investment returns (or overly optimistic return assumptions), insufficient pension contributions, and deviations from a host of actuarial assumptions, many state and local taxpayers are now on the hook for increasingly high pension contributions for decades to come.
The Arkansas Public Employees Retirement System (APERS), whose debt has ballooned over the past 22 years from $229 million overfunded in 1997 to $2.28 billion underfunded last year, and only 79 percent funded today, is one of the many examples of this phenomenon that can be seen nationwide.
Figure 1: Pension Solvency of APERS from 1997 to 2018
Unsurprisingly, a public pension plan with an ever-growing mountain of pension debt, which itself accrues interest over time, costs much more for the taxpayer to operate than the one without. An analysis of pension debt per person illustrates this concept.
According to the American Legislative Exchange Council—which discounts pension liabilities using more conservative assumptions—the four states with the most burdensome levels of pension debt last year were Alaska, Connecticut, California, and Illinois—with each person on the hook for over $28,000 in unfunded pension liabilities in those states.
Meanwhile, Tennessee, Indiana, Nebraska, and Florida were among the least entrenched in pension shortfalls—with the pension debt price tag below $11,000 per person.
Figure 2: Unfunded Pension Liabilities Per Capita, 2018
Anil Niraula is a policy analyst at Reason Foundation.