Tags: Financial | Crisis | Next | Disaster

Financial Crisis Sheds Light on the Next Financial Disaster

By    |   Friday, 20 Apr 2012 07:17 AM

Before the 2008 financial crisis, state and local governments weren't required to acknowledge whether they had the money to pay for promised retirement benefits other than pensions.

Nationwide, pension plans have 25 percent less than promised. Illinois has the most dismal record: 55 percent short.

During the past 10 years, pension payments in New York State increased seven-fold, from $1 billion to $7 billion. According to New York City Mayor Michael Bloomberg, "We either have a pension reform bill that really does stop our expenses down the road…or we're just going to go into this spiral down that the state cannot afford."

While the pension situation is dire, meeting future retirement benefits other than pensions is more precarious. According to the Council of State Governments, 20 states don't have viable plans to meet this growing problem.

The Henry J. Kaiser Family Foundation estimates the number of Medicare eligible recipients will rise 70 percent to 78 million in 20 years (by 2030).

During the 1990s, the New Jersey legislature lowered the employee pension contribution requirement as well as the retirement age without guaranteeing projected benefits. Unfunded retiree health benefits are twice that of unfunded pensions. During the past three years, retiree benefits other than pensions quadrupled to $13.5 billion by 2011. Meanwhile, total unfunded benefits reached $59.3 billion in 2010.

According to Moody’s, total unfunded liabilities per person are highest in Alaska at $16,742, followed by Connecticut with $8,281.

Medicare poses a greatest potential liability than Social Security, since expenditure growth isn't capped. In addition, low out-of-pocket payments increase demand for healthcare services by Medicare recipients.

A retiree recently acknowledged to me that he over-utilizes the Medicare system, since he isn't required to pay much for each additional service. This framework isn't a sustainable long-term solution.

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2012-17-20
Friday, 20 Apr 2012 07:17 AM
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