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Blue States Creamed in Pensions Crisis

It’s no longer much of a secret that America is facing a serious pensions crisis, but the severity of that crisis depends on where you live. In much of the South and the breadbasket, they’re a minor concern. In more densely populated states like New York, California, and Illinois, they’re driving state governments to the brink of fiscal meltdown, says US News and World Report:

According to a recent economic study, the cost to fully fund [state and local pension] promises would cost taxpayers $5 trillion over a 30-year period, or nearly $1,400 a year in higher state and local taxes and fees for every household in the country.

Put another way, contributions to pay for public employees’ retirement benefits now total 5.7 percent a year of all state and local taxes, fees, and other government charges. “Government contributions to state and local pension systems must rise to 14.1 percent” to produce fully funded pension systems, the study said, and it will take 30 years to get there.

None of the options for addressing these shortfalls are particularly attractive:

Adopting a much harsher “hard freeze” policy would stop all future benefit increases. No benefits would be revoked, but they would not grow over time to reflect an employee’s rising salary or added years of service. Having frozen future pension liabilities, their study assumes states and localities would add a new defined-contribution plan and would need to make employer contributions into that plan. This approach would reduce annual taxpayer increases to $800—a figure still above what many taxpayers would tolerate.

The alternative strategy, of course, is to reduce the retirement promises made to public employees. And that is what most people expect will happen to state and local government pensions.

The report also includes a state-by-state breakdown of pension funding gaps, including estimates of how much each household would need to pay in tax increases to close the gap.

The list includes a few surprises: California comes in sixth at $1,900 per household, while New Jersey, Ohio, Wyoming, Oregon and New York households would all be on the hook for more than $2,000. New York’s $17 billion shortfall is particularly bad; taxpayers would have to pay an additional $2,250 per household, for 30 years, to make up the difference.

Meanwhile, at the other end of the list, states like Idaho, Arizona, West Virginia, Utah, Arkansas, and finally Indiana would require more modest increases of $800 per household or less. Indiana is in particularly good shape, with a per household shortfall of only $329.

When looking at the list, it’s hard to miss how the costs seem to break down according to the red-blue political divide. This raises an interesting conundrum: The states that require the biggest tax hikes are those where taxes are already highest. If this isn’t a powerful argument against the blue model, we’re not sure what is.

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