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Blogs / Elizabeth Kellar / The Perils of Payroll Tax and Pension Holidays

The Perils of Payroll Tax and Pension Holidays

I grimaced when the federal government decided to continue the payroll tax holiday for at  least two more months in 2012.  Sure, people can use the cash and it is an efficient way to stimulate consumer spending.  But it worries me that nothing is being done to address the long-term financial health of Social Security and Medicare.

The federal government could learn a great deal by looking at what has – and has not – worked   to ensure sound funding of state and local pensions. 

  1. The best-funded state and local pension plans rarely, if ever, take a holiday from making their pension contributions.  State and local employees always make their contributions, so the issue is whether or not the employer consistently makes its contribution.  States like Illinois and New Jersey are struggling to get their pension plans back on track, in large part because they gave themselves multiple pension holidays.  
  2. On the other hand, the Illinois Municipal Retirement Fund (IMRF) http://tiny.cc/ob3hn has remained more than 80 percent funded, even after the economic downturn of 2008 and 2009. What makes IMRF different from other Illinois pension plans?  The municipalities in the IMRF make their employer contribution year after year.
  3. Making relatively small changes can strengthen pension funding over time.  Since 2009, more than 40 states have made changes to benefit levels, contribution rate structures, or both; many local governments have made similar fixes to their plans.  Some have raised the retirement age or adjusted cost of living provisions. 
  4. With some $3 trillion held in pension trusts for current and future retirees, most states and local governments have substantial assets set aside to weather the economic times.  It’s not a time for complacency, though, since an aging government workforce and more retirees will require ongoing funding discipline -- and sound actuarial assumptions.

The sooner we get serious about our long-term obligations, the better positioned we’ll be to keep our retirement promises.

Want the facts about state and local pensions, state and municipal bankruptcy, and municipal bonds?  “Facts You Should Know,” http://tiny.cc/n6ehq

Comments

Paul Shew
Paul Shew said

Beth,

Good, concise article on a difficult structural issue.

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