Pennsylvania and New Jersey’s underfunded public pension systems have severely strained their state budgets and put their taxpayers at risk of bearing a potentially significant financial burden. Though Delaware’s gap is considerably narrower, its pension assets also fall short of liabilities. By some estimates, the shortfall between promised state pension benefits and available funding in the three states totals nearly $103 billion, and the potential per capita tax burden as of 2013 ranged from $1,179 in Delaware to $5,728 in New Jersey. Yet, as serious as this sounds, is the problem actually significantly worse?
The size of a state’s pension gap matters of course to its active and retired workers, but also to all its residents. That’s because pension obligations are promises — more legally binding in some states than others — to make payments to workers at a future time. Failing to accumulate enough money to make good on these promises can force states to raise taxes or cut programs, or both.
How can a pension plan be reasonably sure it will meet its obligations? First, a plan needs to adhere to an actuarially determined schedule of contributions to the pension fund. Second, plans rely on the growth of their funds, which are invested in stocks, bonds, and other investments.
This article appeared in the Second Quarter 2016 edition of Economic Insights. Download and read the full issue.