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Funding Solution: Separate Out "Legacy" Pension Debt

Retirement policy experts recommend that pension debt be paid off as quickly as possible to avoid the accumulation of interest payments. But because states have limited resources, it is reasonable to stretch out paying down pension debt over a period of time. Most pension experts suggest the ideal timeframe to pay down pension debt is within 15 to 25 years.

The problem is that the pension debt in many states is so large that it is fiscally painful to try and get it paid down that quickly. The best thing to do in these cases is to draw a line between all of the current unfunded pension liabilities, and any future pension debt that might continue to accumulate.

Going forward, the state can promise to pay down any future pension debt that is accumulated over a short period of time — for example targeting 15 years. Separately, the state can adopt a plan to pay down the unfunded liabilities from the past, the “legacy” pension debt” over a manageable but perhaps more extended timeframe.

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