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October 2013 Policy Study, Number 13-6

   

Iowa Legislature and Governor Need to Focus on Pension Reform

   

Morningstar National Analysis

   

 

According to Morningstar, on a nationwide basis the government-employee pension plans of the 50 states, plus territories, are funded at 72.6 percent of the amount promised to retirees. The Unfunded Accrued Actuarial Liability (UAAL), or the money which would have to be paid out if the states wrote a check to every potential retiree for the entire amount owed them, is about $2,600 per capita.[3]

 

As outlined in the “State of State Pension Plans 2013” by Morningstar, Iowa’s neighbor to the north, Wisconsin, has the strongest pension system in the country, at 99.9 percent funded, and a UAAL of less than $20 per capita. This strong position is generally attributed to the pension reforms passed and implemented by Wisconsin Governor Scott Walker in 2011. An important part of this reform was increasing the amounts employees paid into the pension funds.[4]

 

Four other states are above 90 percent funded – New York, North Carolina, South Dakota, and Washington – and several others have a UAAL of less than $100 per capita.

 

In general a pension plan is considered to be adequately funded if 80 percent of the money owed is available. Several of Iowa’s other neighbors are in this category, including Minnesota, Missouri, and Nebraska. Anything less than 70 percent is considered to be significantly underfunded.

 

Iowa’s IPERS plan falls in the middle of the pack. The 2012 funded ratio is 79.5 percent, down from 88.6 percent in 2008, and just below the recommended “adequate” funding level. There is a shortfall of just over $6 billion, and the amount owed per capita, if it had to be made up today, is $2,041.[5]

 

Nationally, 26 states and Puerto Rico have significant pension shortfalls, with funding of less than 70 percent.[6] Stated a different way, the pension plans in half of our states are at risk of default or bankruptcy. This will directly affect all taxpayers, because at some point in time the money must be found to pay the promised pensions. Pensions, as most are set up today, are another long-term entitlement program with insufficient funding, similar to Social Security, Medicare, and Medicaid.

 

In contrast to the fiscally responsible government of Wisconsin, an especially bad example is our neighbor to the east, Illinois. In 2012 the pension system there was only funded at 40.4 percent, with a shortfall of $94.5 billion – up from a shortfall of “only” $54.3 billion in 2008. This is a public debt of $7,421 per capita for every citizen of Illinois.[7]

 

The worst pension plan in the country, according to Morningstar, is actually that of Puerto Rico, which is only 11 percent funded, and, even following significant reforms in 2011 and 2013 could potentially be bankrupt in the next few years.[8] Puerto Rico’s situation is especially troubling as it continues to be economically depressed, with taxpayers nationwide providing significant funding to its residents in a wide variety of ways.

 

   

 

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