"Public pensions funds could run dry"

[canadianoutlaw]

Article:

https://www.cbsnews.com/news/study-some-public-pensions-funds-could-run-dry-in-downturn/

 

Pew report:

https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/AWP_92_final.pdf

[ENT Doc]

I think this is an issue that doesn't get enough press.  It needs to be highlighted almost daily.  What the politicians and unions have done to our states' fiscal health is deplorable.  But shame on us too for not holding them all more accountable.

[Steven Podnos MD CFP]

Many municipalities are already bankrupt or irreversibly close-Chicago/Illinois/Hartford CN/ and more.  But, I don't see how that affects the stock market

[afan]

Fortunately, even docs who work for entities that offer public pensions should be able to save enough on top of that to retire.

What happens will be political as well as economic. Detroit did some questionably legal maneuvers to protect pensioners at the expense of bondholders. Who knows whether that will be repeated? I would not count on it.

 

But I think a massive collapse of municipal pension funds with millions of people affected could not occur without a federal response. Way too many voters, way too much bad press. Perhaps issuing more treasuries and using the money to buy up low rated muni debt. Kind of like how they supported the mortgage backed securities industry.

 

I might not want a huge share of my assets in munis, but this will not happen overnight. If the entire market collapses there will be time to get out.

 

I know, Famous Last Words.

[litovskyassetmanagement]

There are several points to be made here:

1) It won't be all at once, some pension funds will fail first, and they will fail gradually (so retirees won't necessarily get nothing, but they will not necessarily get the full amount promised - not at first, but possibly after some time and lots of court battles).

2) This will be addressed piece-meal, such as cutting benefits for any new employees, older employees will most likely get theirs.

3) Because of the way pension accounting is done, these losses won't be felt immediately, so the problem will be passed on to future generations.

4) Government (especially in high tax states such as CA) will try to bail the pensions out by increasing taxes (and decreasing future benefits), but this won't work in the long term.

5) There is ZERO appetite for bailout of state pensions by the federal government, that is 100% guaranteed not to happen.  So the states will be left holding the bag.  And they will have to cut benefits, no way around that.

Unfortunately, this has to happen so that states transition to a 401k platform and eliminate pensions.  Pensions are extremely unfair to the taxpayers that fund those because they hold all of the risk.  Not to mention constant mismanagement of pension plan assets by making big bets (and then taking big losses when the markets come crashing).

At this point, most states such as CA, IL, NJ, etc., have huge shortfalls, and it is only a matter of time before the bill comes due.  However, this could be decades before larger pensions fail so that they can't pay benefits.  Smaller towns/cities will blow up from time to time, but large state pensions will take a very long time.  If there is a huge market crash though, things can speed up somewhat, but everyone will be hurt in the process, not just pensions.

[portlandia]

ENT Doc wrote:

I think this is an issue that doesn’t get enough press.  It needs to be highlighted almost daily.  What the politicians and unions have done to our states’ fiscal health is deplorable.  But shame on us too for not holding them all more accountable.

Click to expand...

Agreed.

There are ~21M public sector employees, and, I would hazard, at least that many public pensioners (retirement age for government service is often 55). This is a significant number of people affected by woeful underfunding of public pensions. The levels of taxation necessary to fulfill all promises to these folks would cause a massive taxpayer revolt. So what happens? I don't know, but this won't end well.

[Dr.V. Investor]

I think tax increase and spending cut is not enough to solve this issue.

1. Demographics- there are more retiree: worker ratio. support ratio is declining.  increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate.

2.  People overestimate the market hence contributing less due to faulty assumptions that market will give 7% annually.   Pension computations are performed by actuaries using assumptions regarding current and future demographics, life expectancy, investment returns, levels of contributions or taxation, and payouts to beneficiaries, among other variables. During a bear market, one's retirement is significantly diminished.  People may need to pull out money from retirement for living expenses or out of fear.

Given real-world return assumptions, pension funds SHOULD lower their return estimates to roughly 3-4% in order to potentially meet future obligations and maintain some solvency.

They won’t make such reforms because “plan participants” won’t let them. Why? Because:

1. It would require a 40% increase in contributions by plan participants which they simply can not afford.


2. Given that many plan participants will retire LONG before 2060 there simply isn’t enough time to solve the issues.

3.  We don't have enough time.Currently, 75.4 million Baby Boomers in America—about 26% of the U.S. population—have reached or will reach retirement age between 2011 and 2030. And many of them are public-sector employees. In a 2015 study of public-sector organizations, nearly half of the responding organizations stated that they could lose 20% or more of their employees to retirement within the next five years. And these retirees are expecting pensions that workers cannot deliver.

 

 

 

 

[MnSaver]

Dr V - my guess is that neither employers or employees want to increase their contributions. For example, in Mn, police/fire pension fund requires a 16.2% employer contribution and a 10.8% employee contribution. Both parties would resist an increase.

For the employees, public pensions can replace 7 figures of retirement savings with a supercharged roi. Even if future benefits are cut, it is still a fabulous return.

[Zaphod]

Dr. V.

The reason they can't make those revisions lower is an accounting issue. All the sudden your balance sheet turns from doing fine to so underwater you're nearly bankrupt. Then your state has its credit rating reduced and you can't get funding at a good price, and the issues start to pile up on themselves.

The good news is the demographics are turning strongly favorable for the foreseeable future and pension benefits are going to be cut for future generations making it much easier to service. They'll offer buyouts, etcccor force them. lots of stop losses, but systemic change is coming, they're just hoping to do it by attrition.