Unfunded pension liabilities—or more appropriately, or future tax obligations—continue to soar in the Lone Star State.
According to the Pension Review Board’s February 2016 Actuarial Valuations Report, unfunded liabilities for Texas’ state and local retirement systems jumped to more than $60 billion recently, an increase in pension debt of $2.7 billion since June 2015 and a rise of $7.7 billion compared to two years ago.
As unfunded liabilities continue to pile up, so too do concerns about what this means for Texas’ fiscal future. A worsening picture could portend to significantly higher taxes and fees, fewer or less well-funded core government services, or even a reduction in retiree benefits.
Source: Texas Pension Review Board
The core of the problem is, of course, Texas’ defined benefit system. As explained in the Foundation’s report Reforming Texas’ State & Local Pension Systems for the 21st Century by Dr. Arthur Laffer, DB systems are fundamentally flawed:
When a state or local government provides a defined benefit pension, the state is creating a government entitlement program. Entitlement programs violate the criteria of sound budgeting principles. Based on sound public finance principles, tax funded programs should be predictable and sustainable, and not reliant upon estimators, actuaries, market conditions, or the legislatures resolve to be fiscally prudent. Entitlement programs create expenditures that are difficult to predict and limit the government’s budget flexibility. Inevitably, entitlement programs lead to unsustainable government spending growth. Consequently, defined pension programs do not meet the criteria of sound fiscal policy.
State governments cannot solve the financial problems of entitlements—such as the Medicaid program—by simply acquiring more assets from which future obligations can be paid. In the case of Medicaid, fundamental reform of both the health care system and the state Medicaid programs are required to solve the Medicaid crisis. The same is true for state pension systems. As such, the defined benefit pension system is the wrong compensation policy for state and local governments.
The key to returning Texas’ state and local retirement systems to sound footing is the elimination of defined benefit plans for new employees and transitioning the state’s workforce into a defined contribution-type system. By changing how Texas offers public pensions, we can achieve a system that is sustainable system for all.
To read more about defined contribution systems, please see here.