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Pension

July 30, 2007

Pension systems struggle nationwide

BOSTON | Massachusetts taxpayers kick in more than $1 billion a year to make up for the state's failure to invest in its workers' retirement decades ago.

The state's $50 billion pension fund is $14.5 billion short of the reserves it needs to earn enough to pay the pensions owed to retirees. So taxpayers must make up the difference.

The state owes another $13.3 billion for the health care benefits promised to its workers and will have to devote more tax money to pay off the debt in coming years.

If there's any good news, many other states struggling with the same problem are in far worse shape.

"You're definitely not alone," said Parry Young, director of the public finance department at Standard & Poor's, the New York bond-rating agency.

Nationwide, states' unfunded pension liabilities to retirees total $284 billion, according to a 2004 S&P; report. The figure represents the difference between the money set aside to pay the pensions of current and future retirees and the amount that those retirees have actually earned.

Massachusetts' $14.5 billion unfunded pension liability, while a lot, looks manageable compared to those of some states, said Ronald Snell, director of state services at the National Association of State Legislatures.

A key measure of a pension fund's soundness is what percentage of its obligations are funded. Massachusetts' $50 billion pension fund is 82 percent funded.

"Massachusetts is in a less serious group," Snell said. "Rhode Island is 65 percent funded. So 80 percent is good."

Massachusetts, unlike some states, contributes annually to the pension fund to complement the pension fund's investment returns, plus an additional sum to help the fund become self-sufficient or, in investment lingo, fully funded by 2023.

In the 1960s and 1970s, a number of states began to shift from a pay-as-you-go system that pays pensions out of annual budgets to investing for the long term, Young said. Massachusetts only started doing that in the late 1980s.

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