Connecticut’s Failing Pension System

Connecticut voters chose a new administration and legislature this week, hoping this next iteration of state government will be able to successfully navigate the tricky economic cross currents that are swamping so many families and businesses. What experience tells us, however, is that governors and lawmakers can only do so much, especially when the financial underpinnings of government itself are so shaky. The state faces budget gaps of nearly $7 billion in the next two years. Can we expect a government to meet the needs and expectations of taxpayers, towns and cities, and the business community when the balance sheets for apparatus of government itself are so far out of whack?

Elected officials and bureaucrats might find a little patience and forbearance from the public they serve as they set about to address our shared problems if we, as taxpayers, had the sense that we’re all in this together. But in one area, the state operates in a different realm from the rest of us. The state’s pension system has for years been at odds with the reality most of us know as we plan for our own retirement years. The way Connecticut funds the retirement of state employees is failing on two levels.

Financially, the state’s pension system will go broke in less than a decade. A study released by Northwestern University last June projected that Connecticut’s pension fund will run out of money in 2019, one of seven state retirement funds across the nation that is headed for insolvency in the next ten years. The pension fund is in trouble for a couple of reasons. In the 1990s the Rowland administration raided the fund to reduce short-term costs by adopting what amounts to a balloon payment system to finance it. So instead of having steady payments, the state’s pension costs will increase by 50 percent by 2017, double by 2026, and triple by 2038, according to actuarial estimates. Additionally, in 2009 the Rell administration offered a retirement incentive program as a way to eliminate the high salaries of veteran state bureaucrats in an effort to trim the state budget. The savings are a mirage, however, since they result in higher immediate payouts from the pension fund, depriving the fund of investment income over the long-term that more than offsets the short-term savings. The state needs to lose its bad habit of chasing short-term solutions to its financial problems. They are inevitably money losers in the long run.

Politically, Connecticut’s pension system for state employees fails the “we’re-all-in-this-together” test. The state provides its employees a defined benefit pension plan, which guarantees employees a specific annual payment upon retirement. It is the kind of retirement plan that hasn’t been seen much in the private sector for more than 20 years — and for good reason: it is too expensive. Businesses large and small have long since moved to defined contribution plans, such as 401(k)s, where employees defer income (and income taxes) through payments into the plan. Some lucky employees still have employers that match a portion of their payments, though spending cutbacks in the private sector are driving that perquisite into extinction. So now Connecticut taxpayers face the prospect of paying a billion dollars or more annually in the coming years to fund retirement benefits for a privileged cadre of state workers — benefits that they themselves might dream about but do not have. (The last actuarial valuation of the state employees retirement system in 2008 found the pension fund had obligations of $19.2 billion to 40,000 current retirees and 53,000 others working toward retirement.)

We anticipate that our newly elected leaders will ask our patience while they dig Connecticut out of the financial hole it is in. But until they address the financial and political failings of the state employees’ pension system, they may ask for patience, but they should expect resentment and resistance.