It seems that personal finance bloggers like to poke fun at the giant financial mess called California. We have one of the highest unemployment rates (12.4%), our housing market collapsed and don’t forget the humongous state budget deficit of $26 billion.
A lot of that deficit is caused by generous state employee pensions. Cities have the same problem in the golden state. I have news for everyone. California is not the only state in trouble.
The Pension Monster
According to the Brookings Institution, Philadelphia’s pension plan may become insolvent as early as 2014. Boston and Chicago may join them in 2018 along with the state of Illinois. Indiana and Connecticut follow in 2019.
This is a problem that has to be addressed fast as these states have less than a decade. California is at least solvent through 2030!
It’s not just an American problem. We’ve seen the protests in Europe over proposed pension cuts. It’s a global issue as France, Greece, United Kingdom and Japan all struggle with the same issue.
What Caused It
The main culprit seems to be over-optimistic projections regarding investment performance. Just like individuals that banked on their 401ks and homes value to continue growing at unsustainable levels, so did our government. After all, these institutions are run by people.
The city of San Diego halted contributions when the stock market was doing so well thinking the money would never be missed.
Another issue is failing to plan for the sheer numbers in the baby boomer generation. We started turning 65 on January 1, 2011 and 10,000 at day will be meeting that milestone. With generous government pensions, many have been retiring for the past decade.
There is no easy answer and the employee unions won’t like any of them because they require sacrifice. The taxpayers can’t afford to continue funding generous pensions for the few.
I don’t think there is one thing that will resolve it but rather a series of changes, but here are some ideas.
1. Raise the retirement age. In California, the pension age is 55 which is much earlier than the private sector.
2. Cap Pension Amount. The average worker receives a modest average $25,000 per year pension. But others receive more than $100,000 per year. That’s amazing!
3. Revise Payment Methodology. What I mean by this is instead of basing it on the last year’s salary, base it on an average of several years similiar to social security.
Are public pensions an issue where you live? What ideas do you have to resolve this problem?