One of the knocks against defined contribution plans is that individuals “are now responsible for their own retirement,” yet is that really a negative?
A recent pension report out of Illinois illustrates why relying on others (and especially the government) isn’t much better.
“Trying to get pension funding back on track, state officials designated $8.5 billion last year to five state-funded retirement systems,” Chicago’s Daily Herald writes of analysis from Illinois’ Commission on Government Forecasting and Accountability.
It wasn’t enough, according to the paper, and five pension programs fell a combined $3.8 billion further in debt.
Specifically, the report notes that at the end of the state’s 2019 fiscal year, the unfunded liability stood at $137.2 billion, an increase of 2.6% over FY 2018 despite the added contributions.
An actuarial overshot
Two factors worsened the situation, according to officials.
The first was lower investment returns by all five of the combined retirement systems; the second was what the report calls “the unfavorable experience from demographic factors, such as earlier retirement than assumed.”
As the paper notes lawmakers, already concerned about underfunding of teacher pensions, in 1994 set specific funding levels that were to increase each year.
“The goal is to have the five retirement systems 90% funded by 2045. Next year, the state owes a combined $9.2 billion to the five pension funds to keep on track, according to the report.”
But, it adds, lawmakers have routinely ignored the funding targets, “and miscalculations have worsened the gap. Last year, none of the five funds met their investment goals.”
And longevity is, of course, taking a toll, as estimates of how long retirees will collect their pensions are routinely off which, the paper concludes, “has resulted in nearly $18.4 billion in additional debt since 1996.”
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.