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Taxpayers on the hook for $3 trillion in pensions

By Hibah Yousuf, staff reporter

NEW YORK (CNNMoney.com) -- Even if the costly state pension system undergoes reform, taxpayers could get stuck with a hefty bill.

Under the current system, unfunded benefit liabilities -- the amount states owe in promised retirement benefits beyond what they've collected -- exceed $3 trillion.

But even moderate policy changes, which are highly controversial, would only trim that amount by a pinch, according to a recent study released Thursday by Northwestern University economist Joshua Rauh.

For example, reducing cost-of-living adjustments by 1% would decrease the total liabilities by up to 11%, while raising the retirement age by one year would cut costs by up to 4%.

And even more severe changes, like eliminating cost-of-living adjustments and implementing Social Security retirement age parameters would only shave the bill by half to $1.5 trillion, the study said.

"The bottom line is that even much more drastic versions of the policy actions currently being discussed don't come close to solving the problem, since so much of the pension debt is owed to workers who have already retired," Rauh said.

He added that more than half of the unfunded liabilities are owed to workers who have already retired, and instead of seriously considering the idea to cut current retirees' benefits, states are focused on revamping the system to affect new workers.

"Assuming states don't start defaulting on their bonds and other debt, it seems like taxpayers will be footing most of the multi-trillion dollar bill for the pension promises that states have already made to workers."

Earlier this year, Rauh predicted that pension funds in at least seven states could dry up by 2020, and 31 states could be in trouble by 2030.  To top of page

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