The financial health of state and local pension funds has been transformed from a yawn-inducing topic to a frightening one in a few short years. By some measurements, the shortfall across the nation adds up to over $3 trillion or more than two years' worth of state and local tax revenues. In a few states, such as California and Illinois, pension funding has become a major political controversy. This primer focuses on the following key questions:
• What is the problem?
• How big is it?
• How binding is the legal obligation?
• Why do we care about the problem?
• What caused it?
• How can we solve it?
This primer does not address the somewhat similar issue of retiree health care, since it differs considerably from pensions both in its legal status and in the level of predictability of future payments, among other things. To the extent that states are underfunded on that score, as many are, it will doubtless make it still harder to solve the pension problems.
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Douglas J. Elliott, Fellow, Economic Studies, Initiative on Business and Public Policy
The Brookings Institution
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