How Bad Is America’s Pension Funding Problem?

Unfunded liabilities in pension funds are just as onerous as other kinds of debt. Such liabilities now total more than $2.5 trillion and are growing at a rapid pace.

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No sooner had the Chicago teachers’ strike been settled than a new crisis emerged last week in the Windy City. The Chicago Teachers’ Pension Fund was reported to be on the brink of collapse. That fund is not alone. Although the troubles that plague the Social Security system get the most attention, similar dangers now threaten many other kinds of retirement funds. Some plans are being inadequately funded, some have earned unexpectedly low returns, and some suffer from a Baby Boom bulge in the number of retirees. Moreover, the problems facing these funds will in many cases be harder to fix than those for Social Security. And the scale of the total potential shortfall is immense.

There are basically two types of retirement funds. Defined-contribution plans, such as 401(k)s and IRAs, are tax-advantaged accounts owned and largely funded by employees themselves (sometimes with additional contributions by employers). The only real risk for these funds is that the investments in the account may perform poorly. Over the past 12 years, unfortunately, most stocks have gained little or have actually declined in value. As a result, many people approaching retirement today have far less money than they expected.

While such a shortfall is distressing, it doesn’t compare with the dangers posed by the other type of plan. So-called defined-benefit plans promise to pay benefits to retirees based on the length of time they worked and their former salaries. If these plans run short of money, they not only leave retirees unsure that their benefits are safe, they also create a potential cost for whoever has to bail them out (often taxpayers). Such plans can slide along for years hiding their growing internal deficits with accounting tricks. But at some point, the funding gap becomes too big to disguise – which is what is happening now. How bad is the total problem? Let’s add it all up.

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Start with Social Security, which is paying out more than it takes in (not counting the trust fund which will eventually be exhausted). That operating deficit will total more than $800 billion over the next 10 years, according to government projections.

Federal government employees, meanwhile, are covered by a more generous plan, the Federal Employees Retirement System (FERS) annuity, which tops up their Social Security. FERS is also suffering from rising costs, which are becoming burdensome. Indeed, the U.S. Postal Service has warned that it could default if it is not given relief from its funding obligation.

FERS itself was a reform to control the deficits being accrued by the old civil service retirement system. And although hefty government contributions have kept FERS in balance for current employees, the unfunded liability for employees still covered by the old system totals more than $630 billion. While there is no real risk that the Federal Government will be unable to pay promised benefits, the cost has led to calls for restructuring the system more aggressively and requiring employees to contribute substantially more.

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Next, let’s look at the state and local level. Since the recession, most states have been trimming pension costs for public-sector employees. The Wall Street Journal reports that 31 states have reduced benefits for new hires, 26 have required higher contributions from workers and nine have reduced cost-of-living adjustments for retirees. Nonetheless, a huge unfunded liability remains. Boston College calculates that such cuts have reduced a $900 billion shortfall by only $100 billion. Unlike Federal pension plans, which cover a broad cross-section of employees, state and local plans vary enormously from one place to another — so that the worst are much worse than the average. The portion of the obligations that are funded varies from more than 80% to less than 40%.

Finally, corporate pension plans are in the red as well. More than two-thirds of the companies that make up the S&P 500 have defined-benefit plans, and as of last quarter only 18 of them were fully funded. Seven had shortfalls of more than $10 billion apiece, according to the New York Times. All told, the unfunded liabilities add up to around $355 billion, or about 22% of the funds’ promised benefits. Moreover, recent legislation has allowed companies to use higher (and more optimistic) return assumptions. In the very short run such changes take financial pressure off troubled companies and also boost corporate income tax revenue for the government by reducing deductions. But in the long run the deficit is increased and eventually has to be paid.

All together, those unfunded pension liabilities add more than $2.5 trillion to America’s $16 trillion Federal debt and $2.8 trillion state and local debt. Just as it is vital to reduce government deficits, it will eventually be necessary to bring down this pension funding deficit. One way would be to slash retirement benefits by 20%. Another would be to force employees to pay an additional 5% of their salaries toward such benefits. Or taxpayers could cough up the money, bailing out pension funds as they get into trouble. Switching everyone over to defined-contribution plans, such as 401(k)s, would eventually solve the problem as far as young workers are concerned, but would still leave a huge unfunded liability for those approaching retirement.

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None of the solutions sounds very pretty, but one thing is sure: The sooner the problem is tackled, the less painful it will be.

25 comments
concernedmilitaryparent
concernedmilitaryparent

I have a really big problem with retirements funded by govt. whether it be by unions or the govt entity itself. The free enterprise as myself have to provide my own retirement. Why do  the feds fund themselvse with free enterprise money. But they want more funds from the govt. Where does the govt. get there money? The gov has no money when will Obama get it through his head.

WE ARE WATCHING

Algernon Moncrief
Algernon Moncrief

It should also be noted that a number of states (Colorado) are attempting to breach their public pension contracts. This simply kicks the reform can down the road, since these proposals (Colorado's  attempt to take contracted retiree COLA benefits) will eventually be struck down in the courts.  Visit saveperacola.com to read about Colorado's attempted theft (I know . . . you did not expect this from Colorado, neither did I.)

mcmtnstr
mcmtnstr

Yes, underfunded, on the brink of collapse, blah blah blah.

Entirely intentional by design, so that obscenely wealthy people in control of corporations can continue to become obscenely wealthy.

Corporate amp; financing greed- like that practiced by Mitt "Chainsaw" Romney- is irreversibly destroying the viability of unregulated capitalism. Its not enough for businesses to make a profit any longer- its expected that they make obscenely high profits, ever growing. This comes at the expense of ordinary Americans. The uber rich have almost completed their primary long-term objective, of making pensions seem an unaffordable entitlement, as opposed to the common amp; useful benefit that it once was. 

Voters are going to send the Republicans a message, loud amp; clear, until they stop pillaging the middle class.

mamaotis
mamaotis

If the seniors  in the picture keep eating that junk food they won't be around to worry about their pension fund.

Stanley
Stanley

the good old getting tired of bailing out people tax payer

I_heart_pizza
I_heart_pizza

Pensions = Social Security = biggest PONZI schemes ever!

I_heart_pizza
I_heart_pizza

Social Security = Pension Funds = the biggest Ponzi schemes!

I_heart_pizza
I_heart_pizza

Social Security = Pension = Ponzi Schemes

These are the biggest scams out there!

jeff92130
jeff92130

Didn't all those pension funds follow the advice of those registered investment advisers in crisp pin-striped suits?  You know - the ones who had all those impressive looking model portfolios and statistics to back up their mantra of "prudent risk"?   Oh wait - they were really just salesmen masquerading as experts - well...the pension funds lost money - retirees are crushed - but the "really smart investment guys" still got paid all their fees...

Bilosopher
Bilosopher

While most others think we will inflate our way out, I've begun to think contrarian and think we might need to deflate our way back to spending. To resume spending, prices must fall 50% to 70%, with a commensurate fall in our standard of living. We will be living smaller as free trade continues levelling the standard of living, worldwide. America's standard will fall while others are raised.

Just a thought.

Vaengineer
Vaengineer

The big disconnect in all this is that people think that pension returns from the past can continue indefinitely into the future.  Laws that specify minimum  pension contributions require the estimated pension return be the average of the past 25 years.  We are in an age of diminishing returns on growth, and thinking we can get the returns of the past 25 years for the next 25 years is pretty ludicrous.   Throw in the Fed's quantitative easing and guaranteed low interest rates, and we will be lucky to see any return on pension funds to pay these liabilities.

What is Foreclosure
What is Foreclosure

get rid of Social Security, increase the amount of employees contribution to 401k from 16,500 to 30-40k a year!!

JohnYuEsq
JohnYuEsq

Redistributing wealth upward

By Harold Meyerson, Published: September 25

Which is the more redistributionist of our two parties? In recent decades, as Republicans have devoted themselves with laser-like intensity to redistributing America’s wealth and income upward, the evidence suggests the answer is the GOP.

The most obvious way that Republicans have robbed from the middle to give to the rich has been the changes they wrought in the tax code — reducing income taxes for the wealthy in the Reagan and George W. Bush tax cuts, and cutting the tax rate on capital gains to less than half the rate on the top income of upper-middle-class employees.

The less widely understood way that Republicans have helped redistribute wealth to the already wealthy is by changing the rules. Markets don’t function without rules, and the rules that Republican policymakers have made since Ronald Reagan became president have consistently depressed the share of the nation’s income that the middle class can claim.

rjs0
rjs0

the post office pension fund is $11 billion overfunded, amp; they have to pay healthcare for employees that havent been hired yet...if congress mandated that for corporations, they'd all be bankrupt..

JohnParish
JohnParish

Help support the change in the way election campaign funds

are raised.  Stop the Super Pacs from

steering the candidates and ruling the government. 

Come march on Congress and show them that the American

Population do not want candidates to be persuaded by these Super Pacs any more.

Visit www.indiegogo.com/SuperPac

and help raise the awareness of this problem.

Viable Opposition
Viable Opposition

Central bankers have backed themselves into a policy corner from which there are limited options for escape.  As shown here, central bankers are even exploring the option of negative interest rate policies, a choice that would have wide-ranging unintended consequences on the economy:

http://viableopposition.blogsp...

megan03
megan03

You're not funny, or accurate..

Raggedhand
Raggedhand

It's that 10% of your before tax income that you automatically have deducted from your pay every month. If you're not doing that, you're in trouble.  If you're young, start today with 2% and raise it a percent every year until you hit 10%. Buy stocks and if you aren't comfortable with stocks buy about 5 different index funds. Only look at the funds once a year and sell the lowest performer.

And please don't tell me that you can't afford it. I'm a low-pay wage slave and my husband and I have both had our periods of unemployment.  Years ago when we realized he'd never have a pension, we started saving.

It's no fun being an ant in a grasshopper world, until you're 5 years away from retirement at 60 like we are and can look to the future with a bit of confidence.

romerjt
romerjt

Concerning returns from the past 25 years  . . .  this is absolutely true.  In 1980 the DJIA was about 800, 20 years later is was a astounding 13,000, an average increase of about 15% per year!  In NYS,  government and school districts with early retirement incentives were getting employees off the tax rolls and into the pensions funds who were flush with cash.  The DJIA today is about what is was in 2000 and pensions are now a problem.  At some point, we hope, interest rates a annual return on investments will go up and the pension problem will lessen but we are missing a major point . .  what ever, who ever caused this crash, DJIA to 6000,  many of us know who you are, and its too bad we can't put you in jail where you belong.  The damage done is almost beyond comprehension  . .  the numbers are in the trillions.

oldpro
oldpro

less than 10% of corporations have pension plans and of them almost none are open to new employees.  This entire article is about govt and education pensions not private pensions.  When I started working in 1980 GE IBM and others had  pension plans but they were frozen in mid 90's.   The problem is public pensions

BlakeCole
BlakeCole

Janet responded I'm taken by surprise that any one able to profit $6987 in one month on the network. have you look this (Click on menu Home)

tomfiore
tomfiore

Yeah other than the 2/3 of Fortune 500 companies with a collective $355 billion shortfall that the author mentions.