11/11/2010 11:40 pm ET | Updated May 25, 2011

Teachers' $500B Pension Problem Stands To Leave Taxpayers Footing The Bill

Now that the housing crisis is well underway, it's time to look forward to other lurking financial disasters.

According to Time, the crisis to look out for is the $500 billion teachers' pension problem, which stands to cost individual taxpayers thousands of dollars -- in the next few years.

Though a few states currently report surpluses for teacher pensions, most are floundering:

In New Jersey, Illinois, and Connecticut, these unfunded liabilities -- that are just for teacher pensions -- amount to more than $3,000 per state resident. Many experts see a state or city default as a real possibility in the next few years.

States and cities are responsible for regulating benefits for public employees, including teachers. Time says it's local- and state-level officials who've butchered the system through lousy incentives and bad decisions:

According to Time,

"In Pennsylvania, for instance, a 2002 surplus inspired state policymakers to increase benefits for teachers while decreasing the state's contribution to the pension fund. It was a move that made sense politically but was horrendous fiscally -- Pennsylvania's $7 billion surplus by this year had turned into a $10 billion deficit."

The New York Times Magazine reported on the public pension crisis back in June, identifying faulty investments in states like California, New York and Illinois:

"The Teachers' Retirement System of Illinois lost 22 percent in the 2009 fiscal year. Alexandra Harris, a graduate journalism student at Northwestern University who investigated the pension fund, reported that it invested in credit-default swaps on A.I.G., the State of California, Germany, Brazil and "a ton" of subprime-mortgage securities."

Politicians are promising to cut taxes, but to solve the pension problem, it looks like they'll have to raise taxes, and cut spending and pension benefits. Teachers already in the system are safe, but should states revamp guidelines for incoming teachers? Who should make the hefty sacrifice: teachers, state officials or taxpayers?