No pension? You may still owe $30,000 on one

Pension accounts for state and local government workers are underfunded by $4 trillion, according to one recent analysis. If America's households were to split that tab today, each would have to kick in $34,000.

 

Don't have that kind of cash on hand? Another option is to chip away at the shortfall over 30 years starting now. That would cost households $1,400 a year beyond what they pay in taxes today.

 

A pension, for those who aren't familiar with one, is like a 401k plan in reverse. With a 401k, or defined contribution plan, a worker knows how much he socks away, but not how much he will have at retirement. That part depends upon investment returns. With a pension, or defined benefit plan, a worker is told how much he will receive in retirement. It's up to the pension to put aside enough today. To do that, pensions guess about future returns. The higher the returns they assume, they less money they must save today. And therein lies the problem.

 

Most states assume a yearly return of around 8%, says Kil Huh, who manages fiscal research for the Pew Center on the States, a think tank. "In past decades, when investment markets boomed, they were able to achieve those returns," he says. "Now they're not even coming close."