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New Jersey legislation approves cuts in benefits

Pensions file

STEVE CHIOTAKIS: New Jersey lawmakers and Governor Chris Christie have reached a compromise on a bill requiring public employees to pay more for health and pension benefits. It's a measure that mandates more than half a million public workers to pay a larger portion of their health insurance premiums based on income -- very similar to the private sector. New Jersey is just one of many states with a big budget deficit because of pension payouts.

Joshua Rauh is associate professor of finance at Northwestern University and an expert on public pensions.Good morning.

JOSHUA RAUH: Good morning how are you Steve?

CHIOTAKIS: I'm doing well. I'm curious about the types of cuts that workers are taking. Do they differ from state to state.

RAUH: Yes absolutely. You know what's just happened in New Jersey is something that is going to impact the pensions of public employees pretty strongly because the annual cost of living adjustments that retirees are receiving are going to be suspended. Other states are borrowing from some of similar kinds of things New Jersey is doing. Also increasing employee contributions into the funds. Unfortunately the reality is that in most cases, the kinds of changes that are being made don't even really make a dent in the size of this problem.

CHIOTAKIS: So how big a problem is it?

RAUH: State and local pension systems around the U.S. are underfunded by around $3 trillion. That works out to being tens of thousands of dollars per U.S. household. And indeed if you really wanted to solve this problem today by raising taxes or cutting spending, you have to increase taxes just to pay state and local pensions -- you have to increase taxes by almost $1,400 per year per U.S. household. That's how much, for example, property taxes would have to go up to pay for this.

CHIOTAKIS: So far, most of the states making these big cuts are in the northeast and midwest. Why is it isolated just in those regions and could it spread to other regions?

RAUH: You know, it certainly could. And I think it's kind of an accident that it's isolated to those regions. California is a major state in the west that has a $500 billion unfunded pension liability. But they have a unique political structure in that state that can make reforms like this somewhat challenging.

CHIOTAKIS: Joshua Rauh, associate professor of finance over at Northwestern University. Josh, thanks.

RAUH: Thanks very much.

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