Pension liability for private and public pension funds is soaring!
If you're betting on a private or public pension fund being there when you retire, you could be in for a rude awakening. There is a pension liability/bankruptcy domino that has been wobbling back and forth for several years. And it's getting worse, not better.
Mitchell Interview By Forbes
As part of an intriguing interview, September 7, 2011, between Steve Forbes, editor-in-chief of Forbes magazine, and Olivia Mitchell, director of the Pension Research Council at The Wharton School of the University of Pennsylvania, both public and private pensions appear to be in "grave trouble."
Mitchell estimates State pension liabilities alone, for example, are under-funded by nearly $3 Trillion or approximately 69%. Note: How much is a trillion? Counting to 1 trillion would take approximately 30,000 years!...not a typo.
Pensions Overly Optimistic
Further, many pensions are overly optimistic in terms of growth rates (pegged at 7-8%) and don't adequately address increased longevity. Healthier living and better medical solutions have increased longevity one month per year for the last 30 years. Many pensions are based on outdated longevity tables according to Mitchell.
Big Promise Pensions May Take Decades to Fix
On the Public pension side, some states are raising contributions. However, many states have pension-packages that are collectively bargained which will take a long time to unwind. Constitutionally, it may take 20-30 years to address shortfalls and get them under control. States and unions may end up going to the US Supreme Court to determine how to handle contracts that cannot be paid. If you're counting on a monthly check to come out of a court battle that could take years or decades to resolve, it could not only dramatically affect your retirement, but literally destroy your way of life..
Some states are going for broke with risky investments in order to make up lost ground—but it's like playing the lottery. Given the volatility of the stock market, the short fall could turn catastrophic.
Mitchell predicts by 2020 most state and some city pension funds will be exhausted aka, bankrupt. No, this pension shortfall didn't happen overnight. In fact, according to Pew Research 31 states were only 78% funded in 2009. And the Great Recession has made things worse.
Battle over pension costs in Montgomery
Maryland's Montgomery County pension and retiree health accounts are facing a long-term shortfall of more than $4.8 billion, and officials repeatedly have pulled back from difficult decisions needed to close the gap.
The pension programs for the county and the school system are underfunded by about $1.3 billion, and retiree health funds are short by $3.5 billion, county records show.
County agencies have set aside just 3 percent of what they will need to cover health care for retirees. The pension funds, which have been in place much longer, are significantly underfunded.
Source: Washington Post, March 22, 2011
State Pension + Debt = Big Numbers
States' debt loads are high enough, but when you combine them with their pension obligations, the numbers are really eye-popping.
Hawaii's debt, for instance, is $5.2 billion. But so is its pension obligation. Combined, the dual obligations make up 16.2% of the state's economy, according to a report released Thursday by Moody's Investors Service. That's the nation's highest total liability as a share of the state's gross domestic product.
With state economies continuing to reel from the Great Recession, their pension and debt loads are garnering greater attention. States are having a hard enough time just paying for schools and social services, leaving many struggling to make big pension payments as well.
"These are expensive obligations," said Robert Kurtter, Moody's managing director for public finance. "Not crushing burdens, but they add to states' financial stress at a very difficult time."
Just how deep states are in the hole for their pension payments is a matter of debate. A Pew Center on the States report last year pegged the figure at $452 billion. Overall, state pension systems are 84% funded.
Other experts, however, have said the unfunded liability is much greater. Even Kurtter acknowledges that the pension hole is likely understated because of the rules governing states' accounting for retirement benefits.
Source: CNN Money, January 27, 2011
Moody's to Factor Pension Gaps in States' Ratings
States do not now show their pension obligations — funded or not — on their audited financial statements. The board that issues accounting rules does not require them to. And while it has been working on possible changes to the pension accounting rules, investors have grown increasingly nervous about municipal bonds.
Source: Reuters, January 27, 2011