US Pension Funds are massively underfunded and grow progressively more untenable with each recessiona and financial market downturn. Throw in an aging population, unrealistic return expectations and increased pension recipient demands, and we have party! And not the fun kind.
(Bloomberg) — California will be forced to pay billions more in pension contributions for government employees after the state retirement system’s decision to lower its assumed rate of return. [The chief investment officer of the $303 billion California Public Employees’ Retirement System just recommended that it lower its annual assumed rate of return to 7 percent from 7.5 percent, which will require workers to contribute more money to the plan].
California is already paying $5.38 billion to the California Public Employees’ Retirement System this year, and in fiscal year 2018 the state will need to add at least $200 million more. By fiscal year 2024 the annual tab will increase at least $2 billion from current levels. This all comes on top of increases already scheduled under the system, according to Governor Jerry Brown’s finance department.
As fixed costs take up a greater portion of the state’s resources, new programs may become more difficult to bankroll. The state is already committed to a progressive minimum wage increase that will cost it $3.6 billion after it reaches $15 an hour in January 2022 and to pay more in matching funds for Medicaid.
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While it’s prudent, the lower investment return goal makes California “fiscally more vulnerable” if there’s an economic downturn, said Gabriel Petek, an analyst at S&P Global Ratings in San Francisco. “It’s putting more of an element of risk in the state’s fiscal structure.”
H.D. Palmer, a spokesman for the finance department, said that if left unchecked, unfunded obligations could crowd out spending in areas such as education and health-care. Brown on Wednesday hailed the lower investment return target as making the system “more sustainable.”
“It clearly involves additional costs to the state that are significant,” Palmer said. “We’re prepared to incur these costs because the governor has made recognizing and paying down the state’s long-term debt and liabilities a priority.”
California’s revenue is volatile because it draws a large share of taxes from wealthy residents whose incomes are tied closely to the stock market. The top 1 percent of earners — who tend to own shares — accounted for nearly half of the state’s personal income-tax collections in 2014. Voters in November approved a 12-year extension of higher income tax rates on the rich, deepening the reliance on their fortunes.
California stands to benefit from the market’s strong showing, with the S&P 500 Index up 10.62 percent year-to-date. During 2000-2015 the index returned an average of 3.77 percent annually.
Yes, the recovery from the financial crisis (and housing bubble burst) required trillions in fiscal and monetary stimulus. But should CalPERS rely on continued zero interest rate policies from The Fed to bail out their fiscal folly?
Of course, it isn’t just public employee pension funds that are underfunded. Corporate pensions are massively underfunded as well (notice that after the 2001 recession and the financial crisis (2008-2009) that the corporate pension funding status ratio drops into double-digit negative territory).
The pressure to bail out the pension funds will be intense and very ugly. The only solution is private savings/investment plans without taxpayer backing.
Here is a video of California Public Employees gulping down unrealistic pension payments.
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