The state pension funds in 31 states are in jeopardy and could be exhausted by 2030, according to a new study by the Kellogg School of Management at Northwestern University.
Within 10 years, the pension funds in Illinois, Louisiana, New Jersey, Connecticut, Indiana, Oklahoma and Hawaii are expected to be in particularly serious trouble.
How will this affect retirement planning for public employees? If you work for a public entity in one of these states and are close to retirement, should you be concerned? Probably. A report by the Pew Center on the States released last February estimates a $1 trillion gap between the $2.35 trillion states had set aside to pay for retirement and the $3.35 trillion the states had promised workers. The Kellogg report says the gap is closer to $3 trillion.
The systems are already starting to unravel.
In Colorado earlier this year, the legislature passed a pension overhaul bill that requires current retirees to forgo promised raises. While other states have trimmed payments for future retirees, this appears to be the first time a state has required current retirees to give up some of their benefits.
Earlier this month, the U.S. Securities and Exchange Commission charged the state of New Jersey with securities fraud for failing to tell bond investors it was underfunding its pension funds. Last week, New Jersey and the SEC settled and New Jersey promised not to do it anymore -- little reassurance to either state employees or investors.
The result of this suit has been a rush to the door among New Jersey teachers, police officers, firefighters and state workers with retirement applications rising 67 percent through the first seven months of the year, according to the New Jersey Division of Pensions and Benefits.
If it were me and I was expecting a public service pension, I'd start saving outside of the system now. It's just prudent retirement planning.
Many states are betting that the federal government will bail them out, but even if that happens, there is going to be plenty of competition for what will be a limited pot of taxpayer money.