The Plight of Pension Funds Plundered by Retirees.

Pension Funds in America is a subject most of us ignore. Why do we ignore the occasional headline or NPR story about the rising liability of pension funds? My quick answer is because we believe public pension liabilities do not impact our lives. How many family members or friends do you know that contribute a portion of their earnings into a state operated pension fund? My quick count is two. Two of the family members that I know, both of whom work in education, contribute a portion of their monthly earnings towards pension funds. Now depending on your line of work, this number may fluctuate. Pension funds are becoming rare because life expectancy over the past 100+ years has steadily grown. The more retirees the pension funds must support means the more money the pension fund must take in. Let us begin by looking at a few factors that will impact you due to pension fund liabilities.

Number of Retirees

The State of Washington recently released a report on the condition of its public pension fund. A key factor jumped out as I read through the report. The average age of employees contributing to the pension fund was 46.6 years old. Over the next 15 years, a large portion of the pension fund contributors will be retiring. This does not mean that those jobs will go away. Younger workers will fill these vacancies and begin contributing to the pension fund. How much will these younger workers need to pay into the pension fund in order for the pension fund to pay the retirees their guaranteed wage? As baby boomers retire the pressure on pension funds will continue to grow. In the chart below the projected benefit payments will double in the next 15 years, due to the factors I described above. There are three ways to grow the assets in a pension fund. Yield, Employee or Employer Contributions, and Tax Payer Bailouts.

Pension Fund Yield

The report from the State of Washington reviewed the Pension Funds yield. This simply means that the pension fund invested the fund’s money and the money grew based upon those investments. Most pension funds in the 90’s and early 2000’s had a nice growth rate of 4% to 6%. Since the Great Recession in 2007, the growth rates of pension funds are at 2% or below. Therefore, as pension fund yields have been cut in half the fund does not grow as rapidly leaving the fund with more liabilities than assets.

Liabilities in a pension fund are the payments made to the retired workers who contributed to the pension fund for 20, 30 or 40 years.

An asset in a pension fund is money that has grown due to investment, and current workers contributing monthly towards the pension fund.

Employer & Employee Contributions

A quick recap shows a bleak picture. More baby boomers will retire in the next 10–15 years. Therefore, more liabilities, payments to these retirees, will continue to grow. The yield from the pension fund’s investments has been cut in half. This leaves current workers holding “the bag” and they must contribute to the pension fund in order to keep the pension fund solvent (solvent = not going broke!). Most pension funds don’t broadcast this but the projections show that for every $1.00 the pension fund takes in (assets), the fund will pay out $1.38 to retired workers (liabilities). The chart below shows that employees must contribute an additional $885,000,000,000 towards the pension fund in order to keep the fund from going broke. Look at the strain on the Chicago Public Schools. http://www.chicagotribune.com/news/local/breaking/ct-chicago-public-schools-pension-payment-0701-20160630-story.html

The Mess Summed Up

More employees will retire in the next 10 to 15 years which will put a tremendous strain on pension funds in America. The yield or investments of these pension funds are showing returns half of what they used to receive. Therefore, public employers and employees will need to contribute more annually to these pension funds in order to keep them solvent. What happens when employees have had enough taxation on their paycheck by the pension fund? What happens when the public employer (schools, cities, counties) can’t afford to hire because pension fund payments are out of control? ….you step in. The taxpayer.

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