An overview of state retirement systems is essential for employees who are about to retire and want to have the peace of mind of knowing that their future is well taken care of. The article discusses various topics, contributions, funding levels, and employee rights. After reading this article, you will be better able to choose the best retirement plan. Here are some tips to get you started:
Contributions
The amount of employer contributions to state retirement systems depends on whether or not a member has a fund on deposit with the plan. Those who transfer from a contributory retirement plan also must maintain their previous contribution level. The contributions are pooled with other active members and invested in the Pension Reserves Investment Trust (PRIT). The PRIT is managed by a nine-member board chaired by the State Treasurer.
The three primary funding sources for state retirement systems are employer contributions, employee contributions, and investment earnings.
Funding Levels
Increasing employer contributions to state pension plans has a mixed record in recent years. Since 2008, contributions have increased an average of 8% annually, more than twice as fast as state revenues. In addition, state governments have reduced the amount of investment fees and made a significant dent in their unfunded pension liabilities. While higher employer contributions have been a positive development, the increased costs have crowded out other budget priorities and left little room for future pension payments.
Another factor contributing to the underfunding of pensions is demographic pressure. As the population ages, fewer active workers are available to provide contributions to support pension benefit payments.
Employees’ Rights
While most states have statutes that grant public employees contractual rights to their pension benefits, there is a tension between the government’s ability to spend and the constitutional right to ensure that its obligations to its employees are fulfilled. Although most state statutes grant these rights, the IRC and the 26 U.S. Code SS 401(a) discourage state and local governments from drawing down their pension trust funds. In Monahan (2017), for example, state and local government retirees are legally entitled to their pension disbursements. They would be granted this right if federal courts were willing to recognize the state’s sovereignties in the plan.
While state pensions are a great benefit for most employees, they have significant risks. In the next decade, dedicated trust funds will dry, and the state may fall back to a pay-as-you-go status. At this point, the likelihood of future benefit cuts and defaults increases dramatically. Thus, addressing the issue of pension cuts and employee rights is essential to the continued sustainability of state retirement systems.
Costs
State pension costs are based on two metrics: the amount contributed by employees and the percentage of that amount covered by employer contributions. While the average state pension is underfunded by approximately 20 percent, some states have a lower funding ratio. It reflects how state governments have chosen to handle these obligations. According to Pew Research Center, the unfunded liability of state retirement systems has increased by more than half since 1995. Using the underlying data from Pew, the pension debt is projected to increase by $290 billion by 2041.
The funding gap for state pensions remains large, though some states have taken steps to reduce it. In 2017, the U.S. reported operating cash flow ratios of less than 5%. In fiscal 2019, Ohio, Oregon, New Jersey, and Rhode Island all had positive cash flow ratios. The total number of state retirement systems was $115 billion in 2019. That represents an increase of $4 billion from the previous year. However, the gap will widen again in the coming years.
