Will Maine Taxpayers Pay More to Solve Public Pension Crisis?

Will Maine Taxpayers Pay More to Solve Public Pension Crisis?

June 22, 2011 Posted by J. Scott Moody - No Comments

Important Note:  While this is a new analysis I’m reporting on, it does not reflect the very recent changes to Maine’s pension system that was just enacted as part of the new biennium budget.  These changes will reduce the figures discussed in this study, though the changes do not completely solve Maine’s public pension crisis as defined by these two authors.  For more information, see our previous study that Maine’s official public pension burden is much lower than the real public pension burden (pdf).

Joshua D. Rauh just announced on his blog about a new study that he just released, with Robert Novy-Marx, that estimates state and local pension contributions need to increase by a factor of 2.5 to reach solvency in 30 years.  For the average American household, that amounts to a tax increase of $1,398 per household, per year!

The study is titled “The Revenue Demands of Public Employee Pension Promises.” (pdf)  Here is the abstract:

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. Accounting for endogenous shifts in the tax base in response to tax increases or spending cuts increases the dispersion in required incremental contributions among states.

The chart below is taken from Table 5 of their study on page 40 which ranks the states (from highest to lowest) in terms of the size of the necessary tax hike, per year, to achieve solvency of the state’s public pension system.  As you can see, New Jersey ranks top in the country at $2,475 while Indiana comes in last at $329.

The good news is that, relative to the rest of the country, Maine’s taxpayers are better off coming in as the 44th highest tax increase in the country.  The bad news is that Maine’s taxpayers may still face a tax hike of up to $761 per household, per year!  In terms of the budget, the annual pension contribution would more than double under their analysis from $300 million to $700 million.  The recent changes to the pension systems are an important first step, but as you can see they are only a first step.

Estimated Annual Tax Increase Required to Bring State and Local Pensions into Solvency by State_MHPC