Flemming: The consequences of doing nothing on pension crisis

By David Flemming

Imagine you have a mortgage. When you close on your house, the bank gives you a schedule of payments that you’ll have to make each month to pay down the principal and interest. After 15, or 20, or 30 years of fixed payments, the mortgage will be paid off.

Now imagine that, instead of a fixed payment each month, you had to pay $1,000 in January, then $3,000 in February, then $7,000 in March, and increasingly variable amounts every single month. You have no idea what your monthly payment is going to be from month to month or year to year because it’s entirely driven by factors outside of your control.

David Flemming, policy analyst at the Ethan Allen Institute

That’s exactly where Vermont finds itself with its current pension mess.

Because previous governors and legislatures drastically underfunded Vermont’s pensions for years, 15 years ago the Vermont Legislature made a commitment to pay off the state’s unfunded pension liability by 2038. So, they set a schedule and started making payments. But the problem is that the payments are variable, based on the investment performance of the pension funds, the demographics and retirement trends of state employees and teachers, and the generosity of pension benefits.

As a result, each year, the state must pay more and more toward an unfunded liability that just keeps growing. For example, despite making payments toward the pension system that are more than double what they were 10 years ago, the unfunded liability grew by billions over the same period.

If you’re confused so far by this mess, you’re not alone. That’s why lawmakers set up the Pension Benefits, Design, and Funding Task Force this year to come up with recommendations to deal with the problem.

Some would like us to do nothing. Just keep paying more and more money towards an ever-growing liability. For example, after State Treasurer Beth Pearce raised the alarm this past legislative session, House Speaker Jill Krowinski pitched a pension plan, only to drop it and instead form a “task force” after pressure from labor unions. The response was predictable, but frustrating. Pearce called it “disappointing.”

But in reality, it’s much more than disappointing. It’s disastrous. Because the consequences of inaction (or of kicking the problem to task forces and study committees that produce reports that are never acted upon) are unbearable.

First is the cost to taxpayers. In fiscal year 2022 alone, the state will have to pay more than $316 million just to meet our scheduled payments in the pension system (and for other post employment benefits) for a single year. If our demographic, retirement, and investment assumptions don’t change (which they undoubtedly will) the state will need to pay an average of $400 million every single year for the next 16 years. But again, the true figure is surely higher than that as people retire earlier, live longer, continue to receive better-than-average benefits and pay, and as investment returns underperform.

What is the cost of $400 million per year to taxpayers? If we were to spend that money elsewhere, we could increase the state’s budget on higher education by 75%, double funding on housing and community development, triple funding on tourism, cut income taxes by 10% across the board, and reduce property taxes by $20 million, while still having more than $5 million left over. That’s just one example of the opportunity cost of doing nothing and maintaining the status quo. Hundreds of millions forgone on critical investments and tax relief every single year.

But what about the consequences to our state employees and teachers? State labor unions are experiencing tunnel vision on necessary changes to fix bad promises made in the past, but they want to ignore the costs of inaction on the very state workers and educators they represent.

If we do nothing now, it will mean even greater and harder benefit cuts down the road as the unfunded liabilities continue to mount. Today’s $5.6 plus billion unfunded liability will look like chump change if we continue to kick the can down the road. If we don’t have these serious conversations now, it means much more difficult conversations in three, five, or 10 years from now when the crisis has exploded.

We can’t delay the conversation any longer. Unless the latest task force has the courage to propose real solutions that make meaningful changes to the state’s pension system, the costs will only grow exponentially to a point where we simply cannot afford them.

David Flemming is a policy analyst for the Ethan Allen Institute. Reprinted with permission from the Ethan Allen Institute Blog.

10 thoughts on “Flemming: The consequences of doing nothing on pension crisis

  1. The $5.7 billion is based on the notion that all the state employees covered will retire in due course not tomorrow, but when they reach retirement age. So, the $5.7B is not due tomorrow, but prorated over several decades at a lower cost than the fearmongers proclaim, averaging around $275 million a year. if we look at what is reported for taxable income in state data, this is a very manageable problem.

    • 275 million for this, plus the required payment for the current year gets to real money real quick. This is no small problem, $275,000,000.00 is roughly 4% of the 2022 state budget of 7.4 Billion. Outside of Washington and Chittenden counties, this is considered a whole lot of real money.

  2. To Justin Turco:
    I worked as a teacher for 28 years in Vermont. I was smart enough to start an IRA many years ago, foreseeing the mess that the democrats would make of the retirement fund when good old Gov. Dean took charge. I did not think a lot of lawmakers would pile on to his scheme. Was I wrong about that.

  3. From a retired Vermont teacher:
    1. The teachers should not negotiate. Retirement was a promise at hiring. It is a promise that must be kept.
    2. To have two legislators of the quality of Copelan-Hanzas and her long, long, long time co-chair senator is really discouraging. They have admitted to fear that to propose a “rich tax” would be futile with a RINO governor. They refuse to even give it a shot. We know where the teachers union should start retiring these paper tigers net fall.
    Teachers have long memories and it’s time to give these two the gate.

  4. When I retired years ago, I had a team created that looked into the pension problem. Fifteen years and the problem is worse.
    When are the people of Vermont going to open their eyes? Is it going to be when schools cannot get teachers to work in a state that has a pension that is defunded? Maybe when the teachers who taught their children are on the streets because they do not have money to feed themselves, get doctors who can care for them when they are sick, get meds that they need to remain in good health?
    Remember we teachers paid into this pension. My Question – where is all of that money?

    How many of us have moved to other states because of cheaper living conditions?

    People wake up!! Work with the schools, government and any other thing that can save this pension not only for a year but for many, many more year?

    Thank you for listening.

  5. Vermont’s pension fund deficit: $5,600,000,000.00
    Vermont Taxpayers: 294,962
    ( Total tax returns minus those that paid zero tax, 2019)
    Taxpayer liability estimate (excludes interest): $18,985.50

    In essence, each VT taxpayer owes $19,000.00 to the pension fund, that because of political maneuvering can not be paid off, lump sum and liability discharged.
    This liability can only increase, because of the interest owed and increasing state liability.
    Now you know why private business abandoned Defined Benefit Plans in the 1980’s and 1990’s.
    Now you know why the Teacher’s and State Employee’s Unions fight to retain these plans.

  6. Vermont’s unfunded liabilities, what is that these people don’t understand ” UNFUNDED “,
    means no money and you refuse to hold your elected official’s feet to the fire !!

    Follow all the liberal spending bills, and see what they do to relieve these liabilities, they don’t
    care and you elect these fools every year when the bubble breaks “it will ” and you’ll be holding
    your retirement hands on your Azz, saying what !!

    Just to let you know, I retired at 56, with full benefits and a 401k, so teachers & state employees
    enjoy the ride it will end it’s called ” unfunded liabilities “

  7. They will do like every other government is getting ready to do in the near future. They will default on their obligations and tell you how much you like it and it is for your own good.

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