States and localities began creating pension systems for their workers in the early twentieth century. For a time, they proceeded cautiously. New Jersey, for example, instituted a pension system for teachers in 1919, pledging that it would be “established on a scientific (actuarial) basis,” so as to avoid the fate of an earlier worker-funded system that had gone bankrupt.
To help pay for the largesse, the state, beginning in the 1960s, let CalPERS start speculating in real estate and stocks—riskier bets but with potentially higher returns than government securities. Over time, California raised the amount of assets that the pension fund could put into such investments. Other systems eventually followed suit. In 1999, South Carolina, facing pressure to capitalize on the 1990s market boom, became the last state to permit its retirement system to invest in stocks.
legislators discovered that they could pad pension benefits, without contributing much more up-front tax money, by allowing retirement funds to project much higher investment returns—and then invest more aggressively to try to achieve them.
Rather than preserve this bounty, politicians used it as an excuse to hand out yet more new goodies to retired workers—and gave themselves holidays from contributions, to boot. Even as the 1990s bull market collapsed, New Jersey passed 13 separate benefit enhancements between 1999 and 2003, piling billions of dollars in new obligations on the pension system.
Pensions have also had trouble recovering because local reforms have proved inadequate or wind up gutted by courts. Both Connecticut governor Dannel Malloy and New Jersey governor Chris Christie declared victory in enacting pension savings in 2011, though critics warned, accurately, that their states’ pension systems would remain extremely costly. Jersey’s pension payments, only $1 billion in 2012, must rise to $4 billion by 2018—in a state with only a $33 billion budget. Christie has since proposed a much more extensive, money-saving overhaul of Jersey’s retirement system, but he’ll have trouble getting it passed, after proclaiming that the state had solved its pension woes.