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WSJ: US Faces $5 Trillion Pension Hole, Same Size as Japan's Economy

WSJ: US Faces $5 Trillion Pension Hole, Same Size as Japan's Economy
(Steve Woods/Dreamstime)

Tuesday, 31 July 2018 03:40 PM

Financially strapped cities and states can’t afford the retirement payouts they made to public workers years ago and The Wall Street Journal reports that by one estimate they are short $5 trillion, an amount that is roughly equal to the output of Japan, the world’s third-largest economy.

Many retirement funds could face insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed, the Journal warned.

“Uncertainty over public pensions is one reason some Americans are reaching retirement age on shaky financial ground. For this group, median incomes, including Social Security and retirement fund receipts, haven’t risen in years. They have high average debt, and are often using savings for their children’s educations and to care for their elderly parents,” WSJ.com explained.

“A technology-led stock market boom in the late 1990s produced a brief period of surpluses in pensions, according to figures from Pew, before deficits began to creep higher in the mid 2000s. Deficits accelerated following the 2008 financial crisis, which caused steep losses for many funds just as large numbers of baby boomers began to retire,” the Journal explained.

“State and local pensions lost roughly $35 billion in assets between 2008 and 2009, according to Pew. Liabilities, meanwhile, ballooned by more than $100 billion a year, widening the difference between the amount owed to retirees and assets on hand. Not even a nine-year bull market in stocks could close that gap.”

Meanwhile, Maine has adopted a risk-sharing plan for municipal employees that participate in the system starting the fiscal year than began July 1. Under the plan, the risks of investment gains and losses aren’t just assumed by taxpayers, but shared between local governments, their employees and retirees.

Most U.S. public pensions were fully funded as recently as 2000, but the collapse of the internet bubble and the Great Recession caused by the financial crisis of 2008 -- combined in some cases with years of contribution shortfalls and unfunded benefit increases -- resulted in pension debt exceeding $1 trillion, Bloomberg reported 

Between 2003 and 2013 the cost of making required pension payments almost doubled, according to a 2017 report from the Pew Charitable Trusts.

In response, some pensions have adopted formal cost-sharing mechanisms, adjusting contributions or benefits, instead of making unplanned benefit cuts or contribution increases. Almost 30 defined benefit pension plans in 17 states use cost-sharing mechanisms to manage risk, according to the Pew report.

Some states, such as Illinois and New York, have constitutional or statutory prohibitions on changing retiree benefits.

Maine capped contribution rates by municipalities at 12.5 percent and 9 percent for employees, giving both parties certainty about how high costs would go to make up for investment losses. If pension losses exceed the capped contribution rates, retiree cost of living adjustments are reduced. Maine’s local governments and employees share in investment gains and losses at a 55 percent to 45 percent split.

Had Maine’s plan been in effect after the financial crisis, contribution rates would have increased to 12.5 percent and 9 percent and held there for five years. Retirees would have had a 30 percent annual reduction in cost of living adjustment for seven years, according to Gene Kalwarski, chief executive officer at Cheiron, a McLean, Virginia-based actuarial and financial consultancy.

“Under a traditional plan, you have one lever that deals with something like a recession, that’s the employer contribution," Kalwarski said. “Here we’ve got the COLAs as well as the member contributions that reduce what otherwise would have been an employer contribution spike."

When the markets rebound and investment gains exceed the assumed investment return, the COLA would increase until reaching a cap of 2.5 percent. Further gains would allow employers and employees to reduce contributions for services performed by current members when the plan is fully-funded, to a minimum of about 14 percent, 7.7 percent for employers and 6.2 percent for employees.

(Newsmax wire services contributed to this report).

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Financially strapped cities and states can’t afford the retirement payouts they made to public workers years ago and The Wall Street Journal reports that by one estimate they are short $5 trillion, an amount that is roughly equal to the output of Japan, the world’s third-largest economy.
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Tuesday, 31 July 2018 03:40 PM
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