Recently, the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce began rolling out their periodic “comprehensive update” of their data. The update include new data sources and changes in definitions.
One of the most significant definition changes was the way BEA calculates the value of pension benefits. Under the old definition they used a “cash-basis” method which means that they only included actual payments into a pension system. The new definition is based on the “accrual” method which includes the total estimated value of future pensions earned by workers.
The accrual method is superior because the cash being paid into a pension system may not be enough to cover liabilities. This has been especially problematic for government retiree pension and healthcare systems which have been chronically underfunded. Estimates from the Pew Center on the States (pdf) find that state pension funds currently face a $757 billion shortfall and retiree healthcare face a $627 billion shortfall.
Another major reason for the pension shortfalls is the extreme generosity of government benefits (pensions and retiree healthcare) relative to the private sector. The chart below shows the huge gap in benefits between Maine’s state government workers and private sector workers based on the new BEA methodology.
In 2012, the average benefits paid to Maine state government worker’s were a whopping 100.7 percent greater than those of the average private sector worker ($17,308 versus $8,624, respectively). Additionally, the gap has been growing with state government benefits increasing by 47 percent between 2001 and 2012 while private sector benefits grew at a slower pace of 38 percent.
Overall, this growth in state government benefits is unsustainable for two reasons. First, the size of the benefit burden is staggering. Pew reported that Maine was facing a $7 billion pension and retiree healthcare shortfall (pdf)–though it is closer to $5 billion now thanks to pension reforms enacted under Gov. LePage (pdf).
Second, according to an analysis by Maine’s Department of Labor, the size of Maine’s labor force has peaked (ppt) thanks to Demographic Winter. Without strong growth in employment, from where will the money to pay the retiree pension and healthcare shortfall come?
There are two ways forward. The first way was already demonstrated under Gov. LePage. He reformed the pension system and returned some of the savings back to the private sector in the form of income tax reductions.
The second way was more recently demonstrated by the Democratically-controlled Legislature. They chose to protect well-heeled state government workers and raised taxes on the backs of Maine’s poorest.
Which way do you think is most sustainable?