The Wall Street Journal (paywall) reported last week that another year of great investment returns has not saved America’s public pensions. The article estimated that the total funding shortfall of public pensions is $4 trillion.
The average investment return for public pensions for the fiscal year ending June 30 was 12.4%. That’s much better than the assumed 7.5% used in Mississippi and many other systems. But:
Yet many of these public pensions remain severely underfunded despite the recent gains, meaning they don’t have enough assets on hand to fulfill all promises made to their workers. Estimates of their collective shortfall vary from $1.6 trillion to $4 trillion.
“It’s a hole that took a long time to dig, so it will take a long time to fill,” said Fitch Ratings analyst Douglas Offerman.
The pensions’ predicament is the result of decades of low government contributions, overly optimistic investment assumptions, over-promises on benefits and two recessions that left many retirement systems with deep funding holes. Demographics are also a factor: Liabilities are rising as waves of baby boomers retire, leaving fewer active workers left to contribute to pension plans.
Experts warn that pensions will not be able to invest their way out of the crisis:
Even if returns remain elevated, large public pensions won’t be able to reverse their shortfall in coming years, according to Moody’s Investors Service. Large public plans currently have just 70% of what they need to pay future benefits to their retirees, according to 2016 figures from Wilshire Consulting.
Funding levels won’t improve significantly unless cities and states ramp up their yearly pension contributions, according to a recent report by the Center for Retirement Research at Boston College. But budget problems in many states and cities mean governments either can’t afford to make aggressive payments or opt to stretch them over decades so big outlays are delayed.
It’s apparently common knowledge that public pensions are in a crisis and cannot meet their commitments. I recently read this passage in the book Black Edge, by Sheelah Kolhatkar:
Hedge fund investors, the people whose money Cohen had such a talent for multiplying, were a predictable and self-serving group. Many of them, including university endowments and pension funds managing retirement accounts for public school teachers and police officers, were only too happy to overlook the questionable things hedge funds were doing–as long as they made money. Pension fund managers in particular had enormous, in some cases impossible, financial obligations to fulfill for their retirees, and very few ways of earning returns they needed. (emphasis added).
The author made this statement in passing. The book is about insider trading at the hedge fund SAC Capital. It left me with the impression that it’s just common knowledge in the financial industry that public pensions are imploding.