Public Pension Funds: A Retirees Dream Or Looming Nightmare?

Retirement, or grabbing for the brass ring of leisure and relaxation after a lifetime of toil in one or more jobs, is the ultimate dream for many Americans!

Some will arrive at this destination comfortably, at least in terms of finances, while others may struggle if they ever actually have the ability to retire at all. Remember this disturbing statistic…

Federal Reserve Board Governor Lael Brainard – “…44 percent of all respondents could not cover an unexpected $400 emergency expense or would rely on borrowing or selling something to do so. The survey also shows that many adults have no savings for retirement.” (Source)

For those who have worked or are currently working in the public sector, they will often be the beneficiary of pension benefits. For those in the private sector retirement saving is typically up to us in the form of IRA’s and 401K’s.

And, of course, there’s Social Security distributions for all.

Public Pensions: Stable Retirement Funding Or A Ponzi Scheme That Eventually Will Come Crashing Down?

Source: NASRA.org

Investments, Returns and Risk

A pension plan will estimate the return the investment portfolio will earn. For public pensions that number is currently in the 7.5% annually range as the sample chart below indicates.

Source: NASRA.org

And by examining the pie chart above, it’s very apparent that investment growth is a significant piece of the pension fun asset pie. Low interest rates post-financial crisis have hurt and while the stock market has had a great run, an economic downturn or significant selloff would be very detrimental.

And add to this the fact that these low interest rates have pension managers forced to move out on the risk spectrum, investing a greater percentage of assets in stocks as the only real appreciation or return game in town. While many are too young to remember that stocks can go down as well as up, this increases the potential for the already potent underfunding pension plan issue to continue or worsen.

New Workers Paying-in Versus Retired Workers Drawing Pension Benefits

Beyond the issue of investment returns that may lag forecasts, what happens when new contributions to the pool of assets available to pay benefits decline?

Therein lies another risk to a pension funds ability to remain fully funded or even close to that number. Using the Kentucky Employees Retirement System as an example, this chart shows how the number of retirees now outnumber the total of current employees paying into the pension system.

This most definitely creates a cashflow issue and KERS is not unique! In addition consider the fact that retirees are living longer and, well, you get the idea.

Source: Zerohedge.com

Just How Underfunded Are Public Pension Plans?

Much will depend on the assumptions each individual entity makes for investment returns, but the fact of the matter is that most if not all are underfunded to some degree.

For some, the underfunding will at some point create a crisis for retirees and current employees and/or taxpayers, particularly as retirees live longer and if/when the above-mentioned economic or stock market downturn occurs.

For taxpayers and future pension recipients, the issue of their states public pension funds funding is definitely one to keep an eye on, because as taxpayers we are all too painfully aware the powers that be won’t until a dire crisis exists!

Source: Bloomberg

Disclosure: None.

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