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Saturday, September 5, 2015

Social Security and Public Sector Pension Plans Have the Exact Same Problem ... Promised Benefit Levels Are in Serious Jeopardy ... Big Funding Trouble Lies Straight Ahead for Taxpayers, If Not Plan Participants

Most of us don't consider Social Security and public sector pension plan benefits as different sides of the same coin, but they are indeed just that. Payment of both benefits is guaranteed by government --- (1) the federal government in the case of Social Security, and (2) state and local governments with respect to public sector pension benefits.

And while both are funded in part by participants, the buck, aka the guarantee, is provided by the taxpayers. Let us count some of the many similarities between the plans.

First, taxpayers fill in the shortfalls from contributions and investment returns on the monies contributed. Second, the benefit levels are whatever government promises to participants, regardless of whether there is sufficient money in the pot to pay them. Third, they really are nothing more than a tax on future taxpayers, because when the bills come due, that's who will pay them.

Of course, contributions and investment returns over time determine how much money accumulates in the pension funds. The higher the contributions and the investment returns, coupled with how long the money is invested, the fewer taxpayer dollars that must be 'backstopped' to fully fund the retiree benefits. It's that simple.

Thus, the higher the rate of return on investments, the lower the required annual contributions for any given period of time --- and vice versa. And therein lies a big and growing problem for both Social Security and public sector pension plans.

We'll focus specifically on the funding problem for public sector pensions plans herein, since there isn't any money in any fund that could be invested to pay Social Security recipients. Sad but true.

Public Pension Funds Roll Back Return Targets has the following subtitle --- 'Few managers count on returns of 8%-plus a year anymore; governments scramble to make up funding:'

"Public pension funds from California to New York are cutting investment-return predictions to their lowest levels since the 1980s, a shift that portends greater hardships for employees and cash-strapped governments as Americans age.

New upheavals in global markets and a sustained period of low interest rates are forcing officials who manage retirements for nearly 20 million U.S. beneficiaries to abandon a long-held belief that stocks, bonds and other holdings would earn 8% each year, as well as expectations that those gains would fund hundreds of billions of dollars in liabilities.              

More than two-thirds of state retirement systems have trimmed assumptions since 2008 . . . . The average target of 7.68% is the lowest since at least 1989. The peak was 8.1% in 2001.

On Friday, the New York State Common Retirement Fund, the third-largest public pension by assets, said it plans to drop its assumed returns to 7% from 7.5% after cutting a half-percentage point five years ago. That followed Thursday’s vote by the San Diego County Employees Retirement Association to drop its level to 7.5% from 7.75%.

“Realism,” said Brian McDonnell, managing director for pension consultant Cambridge Associates, is “creeping in.”

Moving expectations below 8% isn’t just an arcane accounting move. It has real-life consequences for systems that use these predictions to calculate the present value of obligations owed to retirees. Even slight cutbacks in return targets often mean budget-strained governments or workers are asked to pay significantly more to account for liabilities that are expected to rise as lifespans increase and more Americans retire. A drop of one percentage point will typically boost pension liabilities by 12% . . . .

Public pension funds use a combination of investment income and contributions from employees, states and cities to fund benefits. . . .

U.S. pensions first started to reconsider their investment-return assumptions after being stung by deep losses during the 2008 financial crisis. The event helped drop 10- and 15-year annual returns at large public pensions to 6.9% and 5.8%, respectively, according to the Wilshire Trust Universe Comparison Service. The retirement systems’ median return was 3.4% for the 12 months ended June 30 amid downturns in foreign stocks and bonds, their worst annual performance since 2012.

Retirement systems argue that lowering assumptions fortifies their fiscal health, because the influx of extra contributions means they become less reliant on generating big returns.

Some big funds are preparing to pull their goals back even further. The California Public Employees’ Retirement System, the nation’s largest pension, is discussing a new reduction below its level of 7.5%. . . . “Those days” of believing 8% could be earned annually “aren’t here anymore,” said New York state Comptroller Thomas P. DiNapoli.

But some critics contend that pensions are still relying on unrealistic expectations to fill ballooning funding gaps even as they move targets below 8%. The lower assumptions remain considerably higher than levels seen in the 1960s, when pensions estimated 3% to 3.5% returns from portfolios primarily comprised of cash and bonds. Pension officials pushed their predictions higher in subsequent decades as they embraced riskier holdings of stocks, real estate, commodities and hedge-fund assets. . . .

 A panel of U.S. actuaries and pension specialists has recommended that public systems move their assumed future returns down to 6.4%, and many corporations already use a more conservative rate for their pension funds. The average for companies listed in the Fortune 1000 dropped to 7.1% in 2014 from a high of 9.2% in 2000, according to a Towers Watson survey. . . .

More big pullbacks by public plans would likely create deeper financial pain for governments and employees that have already cut services and benefits. Local and state contributions to retirement systems have more than doubled over the past decade, to $121.1 billion in 2014, according to the U.S. Census Bureau. During that same time worker pension contributions rose 50%, to $45.5 billion."

Summing Up

Politicians know all about the underfunding of pensions and Social Security. So do the public sector union chieftains.

They also know all about the blank check taxpayer guarantees that in effect are being promised by the politicians to future pension beneficiaries.

These  very much 'in-the-know' politicians and union leaders know that We the People will get stuck with the bills, and they definitely aren't anxious for We the 'current voting' People to know the real story behind their publicized version of the story.

Accordingly, We the 'current voting' People need to start looking out for ourselves and future generations as well. 

Because in the end, we are the ones who will be paying all the bills, unless we're willing to pass them on to our kids and grandkids. And that's not even close to being fair.

That's my take.

Thanks. Bob.

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