The Looming Tipping Point of New Jersey’s Pension System

Andrew Biggs prepared a report for The Garden State Initiative that focused on the impact of more retirees than employees.

Notable excerpts:

Nationally, unfunded state and local government pension liabilities remained roughly stable at about $1 billion from 1975 through 1999, but accelerated rapidly in the following two decades, reaching $4.0 trillion in 2020. The combined unfunded liabilities of New Jersey public plans have increased significantly as well, from $58 billion in 2000 to $186 billion in 2019. (page 4)

I analyzed the total contributions made by New Jersey state and local governments to all pension systems that they administer. In 1993, total government contributions equaled $900 billion in nominal dollars, or about $1.661 billion when adjusted for inflation. By the year 2000, statewide government pension contributions had fallen to only $23 million, or about $36 million in today’s inflation-adjusted dollars. By 2010, total pension contributions had risen to $2.09 billion ($2.54 billion in 2021 dollars). And by 2018, pension contributions by state and local government entities in New Jersey reached $4.44 billion ($4.71 billion in 2021 dollars). (page 26)

New Jersey policymakers must decide either to pay more into the state’s public plans or to reduce the benefits those plans pay out. And having made those choices, policymakers then must decide who pays higher contributions — the government, employees, or both — and who receives reduced benefits. These are precisely the kinds of choices that elected officials are reluctant to make, which helps explain how pensions in New Jersey and around the country came to be so underfunded. Given the legal protections afforded to accrued public pension benefits, as well as to the political power of public sector employees, it appears likely that most of unfunded liabilities of New Jersey pensions will be resolved with additional government funds. (page 30)

In summary, federal government figures demonstrate that New Jersey lawmakers promised benefits to employees that were larger than lawmakers were willing or able to fully fund. The New Jersey pension systems instead relied upon returns on risky investments to make up the gap. But, as New Jersey’s investment experience shows, risky investments pay higher expected returns than safe investments precisely because they are risky, even over long periods of time. This leaves only more conventional solutions available, which are both financially and political difficult. All New Jersey pension stakeholders — including lawmakers, public employees and retirees, and taxpayers — must carefully consider how the costs and benefits of pension reforms will be borne. (page 33)

2 responses to this post.

  1. Posted by geoxrge on December 14, 2021 at 5:46 pm

    The Fleeing Young of Illinois: Fiscal trouble looms for the state as its young adults flee.

    …many students who leave the state for college don’t return. The analysts call this “brain drain.” “Only New Jersey lost more college-aged individuals out of state who never returned,” Mr. Kennedy says. Hmmm. What do the two have in common? High taxes, for one.

    State and local government in Illinois is run by public-worker unions, and people are fleeing the economic and fiscal consequences.

    https://www.wsj.com/articles/puerto-rico-on-lake-michigan-illinois-population-university-of-illinois-extension-zach-kennedy-11639077227

    Reply

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