Chapter 3: State and Local Pension Plans During the Great Depression
3. State and local pension plans during the Great Depression By 1930, public sector pensions were widespread in the United States, with roughly 45 percent of all public sector workers in the country covered by a retirement plan.1 The Great Depression was about to test the resilience of many of the plans covering those workers. Local plans in particular came under considerable financial stress during the era, and, as is often the case in the public sector, financial stress was accompanied by political stress. As the economy and the tax base shrink during a recession, taxpayers do not typically welcome an increase in taxes, and thus public revenues usually decrease during a downturn in the economy. Because the state and local governments in the United States typically have severe constraints on the amount they can borrow and on the types of activities they can fund through borrowing, it follows that in some municipalities, the pension plan was threatened by the decline in tax revenues associated with the Depression. The failure to adequately fund most of the municipal plans before the Depression only exacerbated the problem. Despite the natural link between public sector funding – that is, tax revenues – and the solvency of public sector pension plans, somewhat paradoxically, the scenario of insolvency plaguing some municipal plans did not play out with the majority of the nation’s public sector plans. Indeed, the number of state-run plans increased substantially during the 1930s. No state plan was discontinued, and none was ever seriously at...
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