Sep 11, 2015

Trouble Ahead for State Pension Funds

Post by Freedom Partners

Investment return projections for public pension funds have hit a 25-year low, suggesting continued signs of financial weakness for state pensions, according to a report from the National Association of State Retirement Administrators,

After pension fund returns peaked in 2001, the 2008 financial crisis spurred harsh declines in returns—and a tepid economic recovery hasn’t made the situation any better.

According to the report, over two-thirds of state retirement systems have trimmed their return projections—with an average target of 7.6 percent today compared to 8.1 percent in 2001.

A .5 percent cut may not seem all that dramatic, but the consequences turn out to be profound for state and local governments.

A single percentage point decline in expected returns typically requires increased pension contributions of 12 percent. In other words, when returns drop, workers and state governments are left to pick up the tab.

Americans depend heavily on pensions as a source of retirement income, and state governments must now boost pension spending to preserve unsustainable pension benefits.

Four states—Alaska, California, Colorado and Nevada—currently provide annual pension benefits for government career employees of over $60,000. In Colorado, the City of Boulder had to eliminate 100 positions and consolidate city programs to compensate for a reduced investment forecast and rise in pension contributions.

Similarly, the U.S. Census Bureau found that local and state government contributions have more than doubled over the past 10 years, and worker contributions have increased by around 50 percent.

But even as pensions continue to eat up more of states’ budgets, the gap between pension assets and liabilities continues to grow. By 2013, the 50-state shortfall had reached nearly $1 trillion, increasing by $54 billion from the previous year.

As America’s workforce continues to age (over 10,000 Americans retire every day) the pension gap will only get worse.

Clearly state pension funds are on an unsustainable path. Rather than continuing to kick the can down the road, or siphon money from other parts of state budgets, it’s time for states to get serious about enacting real cost-saving reforms to public pension funds.