According to Senate Majority Leader Mitch McConnell, he doesn’t favor a federal bailout of pension funds in the wake of the coronavirus pandemic. McConnell said that he’d prefer the bankruptcy route for states with massive, unfunded pension liabilities, such as New Jersey, Illinois, and Connecticut. No state has declared bankruptcy since the Great Depression.
The Illinois pension funds have an astronomical unfunded liability of $137 billion, as of 2019. New Jersey’s state and local pension funds have $62 billion in unfunded liabilities as of fiscal 2018. In 2019, Connecticut had a funding ratio (which is defined as the share of future obligations covered by current assets) of 38 percent and an unfunded liability of $21.2 billion.
While Mississippi is in better shape than those three states, just bailing out the state’s unfunded pension liability won’t be cheap. The Public Employees' Retirement System of Mississippi now has an unfunded liability of more than $17.6 billion or three years of all general fund tax revenues.
PERS serves most state, city and municipal employees in the state and is only 60.9 percent fully funded.
When asked by radio host Hugh Hewitt about how those three states had given too much to public sector unions, McConnell said there was little appetite among Republicans for a bailout.
“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” McConnell said to Hewitt. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
Demographics and an unsustainable cost of living adjustment are two reasons why PERS is struggling. In 2005, there were 157,101 employees contributing into the system and 69,939 retirees.
By 2019, the number of employees contributing to PERS had shrunk to 150,651, while the number of retirees was up to 107,844. This represents a 54 percent increase in only 15 years.
With those numbers up, payments under the PERS’ cost of living plan are also eating a bigger chunk of the plan’s seed corn. PERS provides a cost of living adjustment that amounts to three percent of the annual retirement allowance for each full fiscal year of retirement until the retired member reaches age 60.
From that point, the three percent rate is compounded for each fiscal year. Since many retirees and beneficiaries choose to receive it as a lump sum at the end of the year, the benefit is known as the 13th check.
Last year, the plan paid $650 million in COLA to beneficiaries. This year, that amount grew 7.6 percent to nearly $700 million. As a percentage of benefits paid, the COLA grew from 24.9 percent of benefits paid in 2018 to 25.4 this year.