http://www.verocommunique.com, now a 501(3)C not-for-profit online news outlet, often receives inquiries from its readers about certain topics of interest; and in this case a reader asked us to research the underfunded pension obligations “on our local Vero/IRC level.”
Here is the inquiry recently received.
“While your article on whether the Indian River County, FL article Emergency Services Department needs to address retention is interesting, I’ll bet a lot of readers would like to know about pension funding shortfall and how that’s intended to be addressed.”
“The biggest (economic, at least) issue we face as a nation is indebtedness.
The way that shows up in in underfunded pension plans. State and local are a large part of that.
Firefighters, police and county employees have been promised pension benefits that can’t be paid.
I’ve never seen anyone address the issue on our local Vero/IRC level.
How much are we committed to paying teachers in retirement and how much do with have in hand?
(Future pension obligations have been taken on with the idea that fund assets would grow at 8%. They’ve been actually increasing at 1-2%)
‘Underfunded Pension’ is a google search term that’s especially popular in the US.
Thanks for your wonderful work !
Here’s a clip from Business Insider :
The credit-rating agency Moody’s says state, local, and federal governments are about $7 trillion short in funding coming pension payments.
‘The unfunded liabilities of the various federal employee pensions systems, covering civilian and military employee benefits, amount to about $3.5 trillion, or 20% of US GDP,’ a release from Moody’s said Wednesday.
‘Additionally, Moody’s estimates that unfunded state and local government pension plan liabilities are of the same magnitude, bringing the total shortfall to 40% of GDP.’
Moody’s also said the public pensions were only one piece of the growing retirement problem in the US.
‘The bigger challenge to the US comes from the unfunded liabilities for the Social Security and Medicare programs,” the report said. “The Social Security funding gap is estimated at $13.4 trillion, or 75% of GDP, while the shortfall from the Hospital Insurance component of the Medicare program amounts $3.2 trillion, or 18% of GDP.’
That means between the pension shortfall and the benefits shortfall, the US government is $20.4 trillion short in funding for retirees.
The combination of all these factors has led some, including Blackstone president and COO Tony James, to call this sort of shortfall in retirement funding the “hidden crisis” facing America.
James’ point was that with corporations moving away from large pension plans and the government facing massive shortfalls in retirement funding, young people will have to rely more heavily on 401(k) plans that are not earning much.
The combination of these factors could force people to work longer or not retire at all. In fact, estimates of current retirement savings show that millennials may have to work until they’re 73 years old.
This is not only an issue for retirees; Moody’s says it is a huge problem for the government.
‘As the stand-alone sustainability of these two programs wanes with an aging population, Social Security and Medicare will be among the primary drivers behind a sharp widening of federal budget deficits that is expected to occur after the fiscal year 2018,’ Steven Hess, a senior vice president for Moody’s, said in the release.
With this lack of funding, it seems public employees and the US government are staring down a huge retirement problem.
I’m a finance guy, see notes about problems with public pensions every day.
Here’s one that’s updated to August.
I know nothing about the local picture. Do county employees have their own retirement system or do they contribute to something at the state level? Do teachers? Is that where the 90% figure came from? Or is it wishful thinking?
I do read that Illinois seems to be in the worst shape:
But elected officials have a way of putting off real fixes and this pension issue keeps being shoved to the back burner.
There was a time when I’d have been able to be more active in helping run down the local numbers but that’s not possible at the moment. You might find a lot more on google. Can’t say how to connect with the people who are more on top of this – I’d think the firefighter union officials would know most so maybe Florida has been more prudent than others. But I can’t imagine that’s the case.
For sure, most people will say, ‘Things are (or will be) just fine.’ [Not]
The questions are two: what’s the status of teachers and firefighters (but why stop with just those job categories?)
‘What are the funding assumptions, the earning per year, of the pension plans.’
They can say, ‘Things are fine,’ without admitting that ‘fine’ means earning 7% on assets in the plans. The real question is, ‘How much did the plan earn last year?’ With interest rates at around zero, 7% is a fantasy.
According to The PEW Charitable Trusts, “The nation’s state-run retirement systems had a $934 billion gap in fiscal year 2014 between the pension benefits that governments have promised their workers and the funding available to meet those obligations. That represents a $35 billion decrease from the shortfall reported for fiscal 2013. The reduction in pension debt was driven primarily by strong investment results, with public plans in fiscal 2014 averaging a 17 percent rate of return.
The most recent comprehensive data from all 50 states does not reflect the impact of weaker investment performance in fiscal 2015, which averaged 3 percent. Performance has been even weaker in the first three quarters of fiscal 2016. Preliminary data from fiscal 2015 point to increases in unfunded liabilities for the majority of states. Total pension debt is expected to be over $1 trillion for state plans, an increase of more than 10 percent from fiscal 2014.
When combined with the shortfalls in local pension systems, this estimate reaches more than $1.5 trillion for fiscal 2015 and will likely remain close to historically high levels as a percentage of U.S. gross domestic product (GDP). The lesson here is that state and local policymakers cannot count solely on investment returns to close the pension funding gap over the long term; they also need to follow funding policies that put them on track to pay down pension debt.”