Current and Future Workers Will Suffer the Consequences of PERS Underfunding

Although largely ignored in Mississippi, national coverage is increasing on the looming catastrophe from underfunding of public pension programs. Here is an Business Insider article titled “Millions of Retirees Are Counting on Pensions That May Not Be There.”

The article states:

The report, which is based on fiscal year 2010 data which is that latest complete data set available, the gap between states’ assets and their obligations for public sector retirement benefits was $1.38 trillion, up nearly 9 percent from the fiscal year 2009. Of that figure, $757 billion was for pension promises, and $627 billion was for retiree health care.

The problem, however, is not a current development the recent financial crisis but goes back over a decade when pension managers began making aggressive return assumptions of 8% – the same as it is today.  With higher return estimations the states were required to fund less into pension plans leaving money available for all sorts of other spending.   What they did not account for, however, was over a decade of near zero return growth, two nasty bear markets which decimated investment accounts, two recessions which lowered tax revenue and a weaker growth economy. PEW stated:

“Investment losses suffered by pension funds during the Great Recession have been a key driver of growth in states’ unfunded liabilities. About $6 of every $10 in the funds comes from earnings on investments; employee and employer contributions make up the rest.”

And it’s not just retirement benefits. Healthcare costs are underfunded as well.

So who will pay for these shortfalls? Young people. Matt Miller of the Washington Post writes:

Yet amazingly, both parties would exempt every current senior from participating in the inevitable adjustments in these programs. Paul Ryan and Barack Obama lock arms in agreeing that everyone over 55 must be spared such changes, even though most of these Americans are getting back far more than they paid into the system. And millions are well-off.

The Democratic president and the Republican budget chairman do this as a matter of bipartisan principle — the principle that avoiding undue risks to reelection is more important than any reasonable notion of generational fairness.

Want more? For years, states have let public pension managers assume their investments would grow 7.5 or 8 percent a year, when 3 to 6 percent has been more realistic. This bipartisan ploy hides trillions more in pension shortfalls, funds that will have to be forked over one day by (you guessed it) younger Americans.