OK, I understand that everyone (myself included) might be somewhat distracted from current financial events as long as the Olympics are going on. The Olympics are also a nice break from the political onslaught of trash talking that we are being subjected to, and unfortunately, that is only going to get worse before it gets better.
I recently read a report from Bloomberg on pension plans, and it got me thinking. We all know, state and local governments are in financial trouble throughout the country. But one thing not being talked about is the very ugly position of the pension plans of state and local governments. So, how long will it be until that shoe drops?
Collectively, state and local pension plans are $4.6 trillion in the hole (http://www.bloomberg.com/news/2012-07-18/u-s-public-pension-shortfall-4-6-trillion-budget-group-says.html). To put it in terms that are easier to understand, that represents underfunding by about 41 percent, on average. In other words, on average, states and local governments only have enough money in their pension plans to pay for about 60 percent of what they are promising to retirees and those who are still working.
One of the biggest culprits is the under-performance of the pension funds themselves. It was common practice to assume that plans would earn 8 percent per year. But when you combine historically-low interest rates with a stock market that has earned essentially very little in the 2000s, you get returns that fall very short of that benchmark.
For example, last year, CALPERS (California Public Employees Retirement System) reported a 1 percent return. They are using 7.5 percent annual returns for all their calculations. You can imagine the hole they are in. They’ll need to earn 14 percent next year just to get back to even, and that doesn’t count the huge hole they are in due to years like 2008.
Overall, the Bloomberg article comes to the conclusion that public pension plans are six times deeper in the hole than they are reporting. This is a huge issue that doesn’t seem to be at the front of any national debate.
So, who’s keeping this news undercover? The people in charge of these programs surely know that they are in trouble. Maybe we are so desensitized about programs that are in trouble, people just don’t care anymore. It seems that the politicians have long ago stopped being about how to fix these sorts of issues, so how will this bode for retirees receiving a pension from a public institution? I’d say the jury is still out on that one.
Looks like the only gold left is in Michael Phelps’ pockets!