A recent review of public retirement and healthcare plans by Pew Charitable Trusts shows that many U.S. jurisdictions are on an unsustainable path.
Vermont is in the middle of the pack relative to other states, but it can legitimately be argued that Vermont’s risks are greater than other states. And it’s imperative that Vermont, with a $3.6 billion unfunded liability, not join the growing list of states with severe benefit problems.
Vermont has made generous retirement and health care promises to state workers and teachers, which must be kept. But, with a challenging economic climate, the question becomes “How can we strengthen our ability to provide these plans in ways that are fair to employees and all taxpayers?”
Currently, three risks are exclusively borne by Vermont’s taxpayers. They are: investment, longevity, and economic growth risks.
Our state pension plans are based on an expected return of 7.5% a year, but actual returns over the last ten years have been 4.2%, leaving us to wonder if 7.5% is a realistic expectation for the future.
Our public pension plans were not designed for 30 to 40 years of retirement. Soon, life expectancy will exceed 100 for many individuals. Without changes, many individuals could collect retirement benefits for more years than they worked.
And given current trends, Vermont will have many fewer wage earning taxpayers in the future. The unfunded benefits already equal $15,000 per household, so it will be a challenge to continue funding them with a shrinking tax base and low growth in economic and tax revenues.
Better-rated states have worked hard to reduce costs and strengthen programs – with some making cost sharing adjustments to their Defined Benefit (DB) program, or adopting a hybrid model with elements of both DB and 401K-style components, while others have moved entirely to 401K programs.
Without changes in the program design, we’re committing our children and grandchildren to pay greatly in the future for funding decisions that we’ve made today.
It’s time policymakers took action on this issue on behalf of state workers and teachers, and all current and future taxpayers.