Tax hikes needed for pension funding: report

Reuters News
Posted: Jun 22, 2011 4:19 PM
Tax hikes needed for pension funding: report

NEW YORK (Reuters) - State and local governments will need to raise taxes by $1,398 per household every year for the next 30 years in order to achieve full funding of their pension systems, according to a report released on Wednesday.

The report's authors, Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester, previously predicted that states' existing pension liabilities total around $3 trillion, if expected returns on investments are not counted.

New Jersey will need to increase its revenue by the largest margin, requiring $2,475 more from each household per year, according to the report.

"Without policy changes, contributions to these systems would have to immediately increase by a factor of 2.4, reaching 14.2 percent of the total own-revenue generated by state and local governments (taxes, fees and charges)," the authors wrote.

Pension funding in cities and states deteriorated in recent years as investment earnings dropped and government payments fell as revenue sagged in the wake of the 2007-2009 economic recession.

The issue has sparked heated debates, from the halls of Congress, where lawmakers have suggested allowing states to go bankrupt to undo pension promises, to the streets of Wisconsin's capital, Madison, where thousands demonstrated over public employee rights.

Wall Street rating agencies and investors in the $2.8 trillion municipal bond market are increasingly focusing on unfunded pension liabilities as they weigh the credit-worthiness of state and local government debt.

(Reporting by Edith Honan in New York and Lisa Lambert in Washington; Editing by Padraic Cassidy)