The Pension Funding Crisis Has Begun
Recent fiscal reports combined with current economic conditions show that the pension crisis has begun. The crisis is occurring at the state, federal and corporate level, and it is happening across America. According to industry experts, the financial catastrophe is hitting now because of a disparity between pension commitments and the funds set aside to cover them. Changing demographics are also to blame with fewer workers today for each retiree compared to past statistics. Retirees are also living longer, so there are more of them.
Cutting to Protect Solvency
According to a Bloomberg report, the United States Treasury Department is considering approving a benefit cut. The agency’s plan is to initiate this action to protect the Central States Pension Fund’s solvency. United Parcel Service is warning the U.S. Treasury that if these cuts go through, it will have to take a charge of around $3.8 billion. Because of this, the package delivery company is protesting the agency’s proposal.
In most cases, the deficits in the United States public pension system are repairable, but fixing them will be complex, and the repair will come with unhappy consequences for retirees, taxpayers, employees and even politicians. For instance, tax increases are one way to fix the problem, but those who pay taxes generally balk at paying more while politicians who attempt to enact higher taxes often face taxpayer wrath at the voting stations. Tamara Burden, a leader at Milliman Financial Risk Management, said, “Raising taxes and issuing bonds means a vote, and a lot of public entities have seen those initiatives not pass.”
Making Changes to Repair the System
Along with raising taxes, states could reduce their pension deficits by decreasing the fees that these plans pay out to asset managers. Lowering benefits for current and future retirees is another option as is capping the maximum retirement benefit that each individual receives. In some states, these measures are illegal, so laws would have to be changed. They are also unpopular with those who work in the public sector and unions. Public sector employees could increase their own contributions, or states could move plans into defined contribution programs. Repairing the pension shortfall will need a combination of these resolutions, but what the crisis needs the most is for everyone to agree to a solution.
The Funding Hole
When Chicago voters elected Rahm Emanuel, the former White House Chief of Staff, as their new mayor in 2012, he gave a news conference to let the citizens in on his leadership priorities. He said, “Number one is retirement security and pension reform, so we can give taxpayers and public employees retirement security, which is something we can’t say today.”
The ensuing years have seen the city’s public pension system develop a funding hole that totals from $20 billion to more than $30 billion putting a damper on the mayor’s legacy. The city has been dealing with union discussions, court battles and a credit downgrade, which are all connected to the city’s public pension problems.
Across the nation, similar situations are becoming known. They may not be as severe as Chicago’s pension problems, but many cities and states are facing financial challenges due to the cost of maintaining the retirement incomes of current and future public sector workers.
The Extent of the Pension Crisis
According to the Hoover Institution, the extent of the recent pension crisis is massive. The organization estimates that the country’s combined funding gap comes to around $3.4 trillion. Conservative numbers place this amount closer to $1 trillion. Few pension plans are fully funded, so they don’t have enough money saved to pay their current or future retirees. Also, the funding situation is escalating.
Wilshire Consulting, a company that provides investment advice, reports that to mid-2015, state subsidized pension plans had just 73 percent of the funds that they needed. This percentage is down from 77 percent during 2014. The percentage drop was likely due to volatile market conditions during the last few months of 2015, which continued into the New Year.
Learning from Other Countries
To fix the pension crisis, America could implement a system that’s similar to the one that Australia uses. Down Under, employers contribute a set percentage to their employee’s retirement fund. In addition, the system pays retirees up to $28,000 a year. It’s time for America to stop avoiding its pension crisis. A few changes now could fix the system to make sure that funding is there for tomorrow’s retirees. To read more about America’s pension crisis, visit PersonalMoneyStore.com.