In late April, New York City Mayor Zohran Mamdani proposed closing a $5 billion budget gap by skipping the city’s annual pension-fund contributions. Critics immediately warned that the idea echoed the fiscal gimmicks that helped spark the municipal pension crisis a quarter-century ago. Today, dozens of state and local pension systems remain saddled by that legacy, and taxpayers are still paying billions to clean up the mess. It will take decades to repair—if politicians like Mamdani don’t make it worse first.
The hard lesson of the retirement crisis is that pension debt is among the most difficult obligations to repay. Even as investment managers and political leaders work to close funding gaps, public employees continue earning new retirement benefits, steadily increasing the system’s liabilities. A booming stock market helps, but only to a point: pension debt represents assets that do not exist and therefore cannot compound when markets rise. This explains why, even after the three-year bull market that has seen the S&P 500 swell by 75 percent, state and local pension funds struggle with about $1.5 trillion in debt. And that’s according to the generous accounting standards that local governments use; applying the stricter actuarial formulas that federal law requires of private-sector pension systems, the debt is estimated at closer to $4 trillion.
Finally, a reason to check your email.
Sign up for our free newsletter today.
Much of the responsibility for bolstering pension systems has thus fallen on taxpayers. Over the past 20 years, state government contributions to pension funds have blasted from about $35 billion annually to $185 billion—a relentless yearly average rise of nearly 8 percent. In California, state and local governments that belong to the California Public Employees Retirement System saw their required payments soar from $1.9 billion in 2003 to $7.5 billion in 2010—and then to $24 billion in 2024. New York City’s pension contributions since 2004 have more than quadrupled, to nearly $10 billion—with a budget impact that Mamdani would prefer to ignore. Chicago’s retirement systems are so underfunded that 80 percent of all property-tax revenue now goes to annual pension contributions, and it’s still not enough to reduce the city’s retirement debt.
Generous benefits promised by politicians—often to secure public-sector union support—and the accounting tricks used to mask their cost have made government pensions far more expensive than private retirement plans. Private employers contribute about 6 percent of payroll on average to defined-benefit plans, aided by accounting standards that limit the buildup of unfunded liabilities. Public pensions, by contrast, now cost nearly five times as much, largely because governments must devote enormous sums to paying off past underfunding, according to Stanford finance professor Joshua Rauh.
Dozens of government plans in the worst-funded states and cities pay shockingly high rates to keep their systems afloat. New Jersey’s police and fire pension fund, one of the nation’s most indebted, requires participating governments to contribute more than 100 percent of payroll toward pensions. Put differently, for every dollar paid in salary, they spend roughly another dollar on retirement costs. Michigan’s pension expenses, as a share of payroll, are similarly in the triple digits. States like Connecticut, Illinois, and Arizona, and cities like Chicago and San Diego, must ante up 50 cents or more for pensions for every dollar laid out in salary—a rate ten times or more than the private-sector average.
The cost of adequately funding pensions in some places is so high that repayment plans now gobble up unprecedented portions of the budget. Pew Research reports that Illinois must spend the equivalent of 15 percent of its revenues every year just to fund its pension plans. For New Jersey, the bill amounts to nearly 12 percent of revenues yearly, while Connecticut must lay out about 11 percent and Hawaii 10 percent. And this liability lasts for decades. Based on its current plan, Illinois won’t eliminate its pension shortfall until 2048; New Jersey’s repayment plan stretches until 2056; Connecticut won’t close its gap for another 20–25 years.
Making matters worse, many states and municipalities have also promised retirees rich health benefits that go beyond what Medicare provides. One recent study found that local governments’ unfunded obligations for these promises now amount to nearly $800 billion, a total deficit of over $2 trillion in retirement obligations. A major reason is that states have set aside only about 10 percent of the future cost of retiree health care, leaving little money invested and compounding in the market.
Virtually every reform that governments have adopted to address pension shortfalls—more realistic accounting assumptions, stricter funding requirements, and mandates to make annual contributions—has increased costs for taxpayers. Workers, by contrast, have borne relatively little of the burden, as cuts to even the most generous benefits have been modest. Retirement obligations have become such a drag on public budgets that many taxpayers no longer appreciate how much they contribute to today’s fiscal strains. When Mayor Mamdani proposed skipping pension payments, he unintentionally reminded New Yorkers of those costs. Following his advice would only deepen an already-growing predicament.
