By John Pelletier
If you pay income or real estate taxes in Vermont, you are like an insurance company. You are insuring, with your taxes, the retirement pension and healthcare benefit promises made to state employees and public school teachers.
Like all insurance companies, you are only on the hook if there is a big loss that has not been saved for. But here is the problem: Our state retirement and healthcare plans are currently on an unsustainable path. Without changes, it’s likely that in the future Vermonters will be hit with big tax increases to pay for these promises.
Since 2001, Vermont’s pension obligations have grown much faster than the assets held in the pension plans. In 2001, the funded ratio for the state employees’ and state teachers’ retirement plans was 93 percent and 89 percent, respectively; in 2017, it was 71 percent and 54 percent, respectively. Vermont has no funds set aside to pay for the expensive and growing healthcare retirement benefits.
According to USA Today, we are currently in the midst of the second longest bull market in history (9-plus years) and second in terms of investment gains (over 300 percent in market gains). Are Vermont’s pensions prepared for the next inevitable bear market — a decline in the value of equities that is greater than 20 percent?
Our state pension plans are based on an expected return of 7.5 percent a year. Is that a realistic expectation for the future? Milliman, the world’s largest provider of actuarial services, in a 2017 study, stated that a more realistic rate of return assumption for public pension plans is 6.71 percent.
Today the life expectancy of someone born in 1948 is 85 years. Life expectancy has increased by two years each decade since the middle of the last century. A World Economic Forum report titled “We’ll Live to 100 — How Can We Afford It?” notes that people born in the U.S. in 2007 have a life expectancy of 103 years.
Our public pension and healthcare plans were designed for 10 to 15 years of retirement, not 20 to 45 years. Without changes, many individuals will collect retirement benefits for more years than they worked.
Vermont’s population and its labor force are shrinking. This puts severe limits on Vermont’s economic growth potential. Vermont should expect subpar economic growth in the future compared to other states.
Vermont is the second oldest state in the nation. Only Maine is older. In fact, 1 out of 6 Vermonters is older than 65. Unless things change, Vermont will have many fewer wage-earning taxpayers in the future. How will Vermont fund these retirement benefit promises with a shrinking tax base and low economic and tax revenue growth?
Vermont has made promises to its state employees and teachers. We need to make sure that we can keep these promises without drastically raising taxes on Vermonters or dramatically reducing state services through budget cuts. There will be another stock market crash and recession. Will Vermont be ready, or will it submit a big insurance claim to its taxpayers?
John Pelletier is the director of the Center for Financial Literacy at Champlain College.