The threat of bankruptcy or other type of fiscal disruption
State and local retirement systems in the U.S. face a shortfall of more than a trillion dollars. The majority of states (34) have pension funding levels below 80 per cent. The states with the worst pension funding situation are Connecticut, Ilinois, Kentucky and Rhode Island, all below 55 per cent. This situation threatens the financial viability of many municipalities, with Detroit already declared bankrupt in 2013.
Policy choices and fiscal discipline
The shortfall in retirement funding is due to policy choices and lack of fiscal discipline, in particular: a failure to make annual required payments for pension systems at recommended levels, and promising needed and desirable benefits without properly accounting for them.
Should the federal government step in?
While extensive involvement of the federal government may be disturbing to some decision-makers, research shows that the secondary effects of fiscal problems of states and cities fall upon the entire nation, in particular through the delocalisation of businesses to offshore sites and resultant unemployment.