The sorry state of unfunded pension liability is causing angst and anxiety among those expecting a government-promised defined benefit payout.
The Pew Charitable Trusts analyzed the state pension funding gap for fiscal year 2016, the most recent year for which comprehensive data were available for all 50 states.
It found that state pension funds cumulatively reported a $1.4 trillion deficit—representing a $295 billion jump from 2015 and the 15th annual increase in pension debt since 2000. Overall, it adds, state plans disclosed assets of just $2.6 trillion to cover total liabilities of $4 trillion.
“Many state retirement systems are on an unsustainable course, coming up short on their investment targets and having failed to set aside enough money to fund the pension promises made to public employees,” Pew’s Greg Mennis writes. “Even as contributions from taxpayers over the past decade doubled as a share of state revenue, the total still fell short of what is needed to improve the funding situation.”
Mennis notes lower than expected investment returns caused a major part of the widening of the funding gap.
“The median public pension plan’s investments returned about 1 percent in 2016, well below the median assumption of 7.5 percent—a disparity that added about $146 billion to the debt. Assumption changes—primarily states lowering the assumed rate of return used to calculate pension costs—accounted for another $138 billion in increased liabilities.”
Even if plan assumptions had been met in 2016, he adds, the funding gap would have increased by $13 billion because states did not allocate enough to their systems. Overall, they would have needed to contribute $109 billion to pay for both the cost of new benefits and interest on pension debt; the actual amount contributed, $96 billion, fell short.
“There is no one-size-fits-all solution to the pension funding shortfall and the budgetary challenges facing individual states, but without new policies that commit states to fully funding retirement systems, the impact on other essential services—and the potential for unpaid pension promises—will increase,” Pew warns.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
