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Plunging stock and bond prices have left state and local public pension funds with assets to cover only 77.9 percent of what they will eventually owe, Bloomberg reported.
Last year, the funds had 84.8 percent of the money needed to meet their obligations, according to the nonprofit Equable Institute.
That translates to almost $500 billion less that pension funds have on hand.
Calpers, California’s pension fund for public employees and the nation’s largest, reported it lost 6.1 percent of its value in its most recently completed fiscal year.
Idaho’s public employee retirement fund shed 9.5 percent in its fiscal year ending 30 June, its fourth worst return ever.
Public pension funds have lost an average of 10.4 percent so far this year, Equable calculated, erasing about half of the 25-percent gains the funds booked last year as federal stimulus money kept financial markets oiled.
“The threat to states is not the investment losses,” Anthony Randazzo, Equable’s executive director, told Bloomberg. “The threat is the contribution rates that are going to have to go up because of the investment losses.”
Corporate and individual contributions to pension funds, now around 30 percent of payroll, will need to rise to 35 percent by 2030 to ensure funds can meet their obligations, Randazzo estimates.
Public pension funds’ unfunded liability will reach $1.4 trillion this year, he warned.
For years, public pension funds have been seeing their future liabilities grow faster than their assets.
To make up the difference, pension funds have been venturing into riskier investments that dangle the chance of high profits, such as junk bonds and private equity, the latter now comprising more than 10 percent of state pension funds’ holdings, Equable said.
However, the Ukraine war and resulting sanctions, inflation, and rising interest rates have dashed many of those hopes.
Most recently, pension funds have been borrowing to invest, as we reported in “Pension Funds, Facing Deficits, Borrow to Invest” (5 July, 2022).
If pension funds are unable to meet their obligations, their payments are taken on by the Pension Benefit Guaranty Corp. (PBGC), a federal agency that insures pension funds, meaning that taxpayers supply the missing money.
TREND FORECAST: With Americans increasingly having to choose which basic expenses to not pay from month to month (see “Consumers Find It Harder to Pay Bills Now Than During the COVID War” in this issue), workers will balk at seeing more taken out of their paychecks to fund a far-off retirement.
A growing number of retirement funds will be unable to meet their obligations, especially when the 65-million-strong Generation X begins to retire in 10 years.
When that happens, state and federal taxpayers will be handed the bill—the same taxpayers already covering Social Security and Medicare costs for Baby Boomers.
Ultimately, to prevent a collapse of the pension system and widespread bankruptcies among retirement funds, legislatures will be forced to step in with solutions that will roil the retirement plans of millions of Americans.