I have been watching blogs for the past year talking about the pension crisis that will be coming in the near future.  While I never was in Boy Scouts, the message of preparation is loud and clear.  According to several publications US pension plans may be  only 60% funded or some other number that might be even less.   

For example, the Massachusetts Teachers’ Retirement Pension System is only listed at 53% funded by Statedatalab.org (
https://www.statedatalab.org/pension_database) for 2016.  The Illinois General Assembly is listed by that same organization as being 13% funded for 2016.  The Ohio Highway Patrol System is listed at 63% funded for 2016.    The Pittsburgh Firemen’s Relief and Pension Plan is listed as 32% funded for 2016.  The Kentucky Teachers’ Retirement System is listed as 35% funded for 2016.  In Colorado, the PERA School Division Trust Fund is listed at 43% funded for 2016.  In New Jersey, the Teachers’ Pension and Annuity Fund is 22% funded for 2016 while the Judicial Retirement System is 18% Funded for 2016.  The problem extends across America.

These might be bad enough, but I also ran across an article that says that the Governmental Accounting Standards Board (GASB) “accounting rules help pension plans calculate a “best guess” annual contribution that gives the plan a roughly 50 percent probability of being able to meet its benefit obligations.”  Let me say that again, a fully funded pension plan has only a 50 percent chance of meeting what everyone thinks they will get.

Many pensions have assumed that they will continue to get the long term S&P 500 return of 7%.  Some have even assumed higher rates.  However, that long term value is an average.  That means you will have some really great returns, like what has happened in this year and last, and some really bad returns, like in 2008.  So, the longer we have really good returns, the more likely the future returns will be less than average.  The bad news is that if the return is less, the pensions are even more underfunded.

You would not want to be told that the market is down this year, so you can only get 75% of your pension, but if you wait a couple of years,  you will get  more.  That doesn’t work for the majority of people.  They need the money now. This may require the pension company to sell assets for less to give you the monthly pension check.  If there is a sudden market crash, selling assets at discounts just to raise cash to pay pensions would result in faster depletions of the assets, with the potential for a smaller check in the future.

When the pensions are for government employees, the general view has been to increase taxes to pay for the immediate pension problems.  This results is less money for the government to spend on roads, police, fire, and other essentials. There is also a tendency for politicians to vote for more money for government workers in order to buy their votes.  However, there is often a lack of desire by taxpayers to actually pay for raises for public employees. As people flee from California and Illinois, those who are left will be facing even higher taxes.  Recently, I  read of property values  decreasing in Illinois.  This will only make the situation worse for those who have to pay  higher tax rates to support  government workers already on pensions or those who will be receiving pensions.

And it’s not just government pensions. Many have heard of the Central States Pension Fund.  That fund was less than 47% funded in 2007 and is now estimated to be less than 30% funded with only about 59% of the members left to contribute.  March 1 of last year, the Naples Daily News reported the Pension Benefit Guaranty Corporation (PBGC) had $2 billion in assets and in 2016 had paid out $113 million to 65 bankrupt plans.  There is a decent chance that paying just to bail out the Central States Pension Fund could bankrupt the PBGC.

It is said that the average saving for a family aged 56 to 61 is $163,577.  Per an article from The Balance, the average monthly Social Security benefit is $1,329.  Further, Social Security is in trouble.  The 2017 report says the combined Old Age and Survivors Trust Fund along with the Disability Insurance Trust Fund, together (OASDI) will be depleted by 2034. 

In conclusion, if you have a defined benefit pension plan and your employer doesn't explain clearly how your pension plan is funded, ask that they do so, and, just as importantly, if you haven’t been preparing by saving for your retirement, start doing something about it ASAP.

Bill Hamm