Friday, June 24, 2011

Fully-funded public pensions could cost Ohioans $2,541 more per year

If states and local governments are going to pay pensions under current policies, contributions would have to immediately increase by a factor of 2.5, which represents a tax increase of $1,398 per U.S. household per year.

That's the finding of a new report from Northwestern University by Robert Novy-Marx (University of Rochester and NBER) and Joshua D. Rauh (Kellogg School of Management and NBER).

The report, The Revenue Demands of Public Employee Pension Promises, states:

We calculate the increases in state and local revenues required to achieve full funding of state and local pension systems in the U.S. over the next 30 years. Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.5, reaching 14.2% of the total own-revenue generated by state and local governments (taxes, fees and charges). This represents a tax increase of $1,398 per U.S. household per year, above and beyond revenue generated by expected economic growth. In thirteen states the necessary increases are more than $1,500 per household per year, and in five states they are more than $2,000 per household per year. Shifting all new employees onto defined contribution plans and Social Security still leaves required increases at an average of $1,223 per household. Even with a hard freeze of all benefits at today’s levels, contributions still have to rise by more than $800 per U.S. household to achieve full funding in 30 years. (emphasis added)

According to the report, Ohio would require one of the largest increases relative to GSP (gross state product) and "would need the immediate increase to be several hundred dollars larger per household" than other states. Based upon their analysis, Ohio's required tax could be as high as $2,541 per household.

They also say:

At sufficiently high parameterizations there would be no level of taxation sufficient for Ohio or Oregon to amortize their legacy liabilities. The tax burdens and service cuts become so onerous on residents that decide to stay in the state that everyone immediately moves out.

Only New Jersey, New York, Oregon and Wyoming would require a higher tax per household than Ohio to fully fund the pensions, if there are no policy changes.

While some of the writing is technical, I hope you'll take the time to read the entire report and understand the dire situation Ohio is facing with its public pensions.

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