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Are Public Pension Funds Sustainable?

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Are Public Pension Funds Sustainable?

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Are Public Pension Funds Sustainable?

Are Public Pension Funds Sustainable?

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The payout of pensions is proving financially burdensome to states and localities. So how sustainable are these pensions? To find out, Robert Siegel talks to Susan Urahn, managing director of the Pew Center on the States, who helped produce their report "The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform." Urahn says states are obligated to pay because it is a state constitutional obligation, and she says, "The likely scenario is taxes will go up to pay the promises they made."

ROBERT SIEGEL, host:

We're going to focus on one element of the Bell, California, story now: the pensions. The city administrative officer of Bell stands to receive a nearly $900,000 pension, we've heard, which depending on how long he lives could come to quite a tab for the state of California. And while a huge public pension like that one may be a headline grabber, 10 pensions that pay $90,000, or 20 that pay $45,000 each, may be just as burdensome to a state or a locality, and those are a great deal more common.

Well, joining us now is Susan Urahn, managing director of the Pew Center on the States, which issued a report this year on underfunded state retirement systems called "The Trillion Dollar Gap." Welcome to the program.

Ms. SUSAN URAHN (Managing Director, Pew Center on the States): Hello.

SIEGEL: And first, that gap, thats the gap between retirement benefits that states and localities are promised, and what theyve set aside. And your report -do have this right? - said it's a low-side estimate.

Ms. URAHN: It's a very conservative estimate. And it's both what they have not set aside to pay for pensions and for other post-retirement benefits they promised their public retirees, primarily health care.

SIEGEL: Governors commonly observe that while Washington prints money and runs huge deficits, states have to balance their budgets. This is not a picture of fiscal discipline you're describing.

Ms. URAHN: Well, I think what we've seen - you look back over the past decade -that in good times and in bad, states have made policy choices that have not been disciplined and that have resulted, in several cases, in pension funds that dont have sufficient funding.

SIEGEL: You say in good times and bad. In good times, the benefits - the promises might get better. In bad times, it's rare to see them cut back, I gather.

Ms. URAHN: Well, once - a promise made is virtually impossible to take back, and this is part of the challenge that states are facing. Once theyve made those pension promises to their public retirees, they are pretty much committed to pay them.

SIEGEL: Is it, in fact, unthinkable to wonder, as these retirement benefit obligations come due and if there just aren't tax revenues to cover them, that promise or no promise, states and cities may someday pay out less than a hundred cents on the dollar?

Ms. URAHN: Well, from the state perspective, in many cases, it is a constitutional obligation. So since states have the power to raise revenue, what may be a more likely scenario is that taxes will go up in order to pay the promises that theyve made.

SIEGEL: A state constitutional obligation, in many states. Is there some doctrine of impossibility that might conflict with that guarantee - you just dont have the money or people would be, you know, paying 70 percent tax rates to afford it?

Ms. URAHN: Well, you know, it's hard to really project out and see that kind of a doomsday scenario. You have a state like Illinois, where the pension is close to 50 percent funded. Thats about as bad as it gets right now, across the country, at least at the state level. And I think the question will be, you know, will they take steps to improve it? And then assuming that the economy begins to come back, I think disciplined steps moving in that direction will move them, over the long haul, into a far healthier space.

SIEGEL: If we think of a - sort of tool kit of remedies - modest decreases in benefits or cost-of-living allowances for benefits, increases in contributions, more taxes, longer periods of waiting to be vested, or an older retirement age - are those tools, in moderation, sufficient to close this gap? Or are we at the point where there has to be a complete rethink of the public pension systems?

Ms. URAHN: Well, many states - and I think we've seen about 16 states this year - began to take steps toward curbing some of the costs and the long-term liabilities. And you're absolutely right about the various tools that are available. It is sort of like the magic of compound interest. When states make modest changes, over time, those changes have a significant impact.

So I think what we are looking at is an opportunity for states to really look very hard at what they promise, make sure they have enough money set aside, and then be disciplined about every year, setting aside the correct amount - the adequate amount - to pay for it.

SIEGEL: Well, Susan Urahn, thank you very much for talking with us.

Ms. URAHN: You're very welcome.

SIEGEL: Susan Urahn is managing director of the Pew Center on the States, whose report - issued earlier this year - is called "The Trillion Dollar Gap: Underfunded State Retirement Systems and the Roads to Reform."

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