The Long Bull Market Has Failed To Fix Public Pensions (#GotBitcoin?)
Sums owed to retirees are accelerating faster than assets on hand to pay those future obligations. The Long Bull Market Has Failed To Fix Public Pensions (#GotBitcoin?)
Maine’s public pension fund earned double-digit returns in six of the past nine years. Yet the Maine Public Employees Retirement System is still $2.9 billion short of what it needs to afford all future benefits to all retirees.
“If the market is doing better, where’s the money?” said one of these retirees, former game warden Daniel Tourtelotte.
The same pressures Maine faces are plaguing public retirement systems around the country. The pressures are coming from a slate of problems, and the longest bull market in U.S. history has failed to solve many of them.
There is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations. Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%, according to the most recent data from Boston College’s Center for Retirement Research.
Here Is How It Got That Way:
The Financial Crisis Happened
Public pension funds have to pay benefits—their liabilities. They hold assets, which grow or shrink through a combination of investment gains or losses and contributions from employers and workers. Those assets generally rose faster than liabilities for five decades starting in the 1950s because government was expanding and the number of retirees was smaller.
In the 1980s and 1990s, double-digit stock and bond returns convinced governments they could afford widespread benefit increases.
But the value of their holdings—their assets—began to fall in the aftermath of the dot-com bust in the 2000s, and the 2008 financial crisis followed soon after. State and local retirement systems lost 28% in 2008 and 2009, according to the Boston College data.
“The first thing you have to do is make up what you lost,” said Sandy Matheson, executive director of the Maine Public Employees Retirement System. “And it takes years. And then you have to make up what you didn’t earn on what you didn’t have. It’s a pretty steep climb.”
Governments Fell Behind On Their Payments
Cities and states set out to ramp up their yearly contributions to public pension funds as a way of making up for their investment losses.
Some were able to keep up with those payments. But others weren’t as they struggled with lower tax revenue and increased demand for government services in the aftermath of the 2008 crisis. New Jersey made less than 15% of its recommended pension payment from 2009 through 2012. It now has a little more than one-third of the cash it needs to pay future benefits—despite robust investment returns in recent years.
State Treasurer Elizabeth Maher Muoio said New Jersey is on “the long road to addressing our unfunded liability after years of neglect.”
“Some of the states allowed themselves to get so underfunded that the higher returns aren’t helping them enough,” said Michael Cembalest, chairman of market and investment strategy for the asset-management arm of JPMorgan Chase & Co. and the author of an annual study on the financial health of cities and states.
Some states, including New York, Wisconsin, Tennessee and South Dakota managed to keep assets roughly in line with liabilities through funding discipline, benefit cuts, or both.
Deeper Pension Cuts Didn’t Materialize
Many states and cities reduced benefits for new employees after 2008. But deeper cuts often met resistance from judges, unions and angry constituents—even in some of the most indebted states.
The Illinois Supreme Court in 2015 threw out cuts by the legislature that were expected to save tens of billions of dollars. Kentucky’s legislature last year declined to approve the governor’s proposed cuts to cost-of-living increases for retired teachers after protests brought thousands to the state capitol and forced cancellations of classes in several school districts.
Maine, which has made more progress than many plans in addressing its unfunded liability, did cut cost-of-living increases for both retired and active state workers. They earn a median pension of $27,000 after 25 or more years’ service and don’t receive Social Security. But that cut shaved only $1.6 billion off the fund’s unfunded liability, which now stands at $2.9 billion.
People Got Older
Demographics became another problem as baby boomers aged. The number of pensioners jumped thanks to longer lifespans and a wave of retirees over the past decade, while the number of active workers remained relatively stable.
Maine’s fund serves about the same number of active workers that it did in 2008—a little more than 51,000—while the number of retirees has jumped 32% to about 45,000. Many funds are experiencing the same trend.
That pattern contributes to an increasing gap between pension fund inflows and outflows—before the funds earn a dollar on investments. Maine’s pension fund paid $982 million in benefits in 2018, $394 million more than the contributions it took in. For a plan trying to improve its funding status, that type of gap makes it harder to recover from investment losses.
The Future Looks Worse
Many public pension funds have benefited from the 10-year-long bull market. But now many are lowering their predictions of what they can earn in the future. That accounting change makes their liabilities look even larger, portending more strain in the coming decades.
The Maine pension fund, which back in the early 1980s assumed a long-term investment return of 10%, now assumes a rate of 6.75%. If that rate were just 1 percentage point higher—where it was about 10 years ago—the projected $2.9 billion shortfall, most of which must be paid off over the next decade, would drop by more than half to $1.1 billion.
The decision to lower the rate was based on discussions with the fund’s actuarial and investment consultants and a goal of keeping costs predictable, said Ms. Matheson, the system’s executive director. “There’s also an element of better safe than sorry.”
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