Problems and concerns over the stability of our pension systems can drop from sight but have a way of quickly resurfacing. An article about how a former Sanitation Department worker is pulling in
|Pensions A Financial Time Bomb Waiting To Explode!|
an astonishing $285,047 a year pension which is more than twice what he was making while actually working is a warning sign of the difficulties ahead. In this case, the man living in New York was just one of the dozens receiving huge pension payouts. The information was revealed in records published Tuesday by the Empire Center for Public Policy a government watchdog. It again moves front and center the problem of pension funds blowing up and going bust in coming years which is set to become a trillion dollar crisis extending from coast to coast.
Unfortunately, brushing aside or trying to ignore the problems brewing in a pension funds ability to meet its obligations down the road does not make them go away. Matters have been made worse by Washington and those placed in a position to mandate change sidestepping responsibility and failing to take any real action. In the recent weeks, two stories popped up to bring this ugly reality back into focus. One covered the crisis or mess existing in Illinois and the other concerned CalPERS, the massive California Public Employees’ Retirement System. CalPERS manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families. In the case of Illinois, the problems clearly stem from a dramatic growth in total pension benefits promised by politicians.
The CalPERS system, on the other hand, claims they are responsible and thought they stood on solid ground, once more than 100 percent funded, CalPERS now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees. And that is assuming it can hit its rather optimistic investment earnings target of 7% per year. This means with the future always moving ever closer CalPERS, has no choice but to change policy and take several steps if it hopes to avoid a complete meltdown.” CalPERS could, of course, modify benefits in some way but the board which is dominated by public employee organizations and sympathetic politicians has rejected this idea.
Last week the $350 billion California Public Employees Retirement System (CalPERS) made a “relatively small change” in its amortization policy. CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years. While this may not sound like much, the bottom line is that it would require the California state government and thousands of local government agencies and school districts to increase their mandatory contributions to the pension trust fund. The problem is that many cities are already complaining that double-digit annual increases in CalPERS payments are driving them towards insolvency.
Wirepoint a group whose mission is to “Connect the dots between Illinois’ economy, government and business” recently released an article pointing the blame directly at Illinois politicians for the state’s massive pension crisis. It debunks the narrative that underfunding has caused Illinois’ state pension crisis. Critics on both sides of the aisle often accuse taxpayers of shortchanging pensions. Wirepoints found that total pension benefits have grown exponentially at an annually compounded rate of 8.8 percent over the past 30 years. Compared to 1987, benefits have grown 1,061 percent. As a result of this unbridled growth the promise of those benefits has overwhelmed the state’s economy and taxpayers’ ability to pay for them.
No business or government can remain solvent with such rapidly growing obligations, especially when that growth overwhelms any ability to pay for it. In fact, Illinois pension benefits grew the third-fastest in the nation between 2003 and 2015. Kentucky, which is suffering a massive pension crisis of its own, was the only nearby state with pension growth similar to Illinois. Its benefits grew 7.4 percent annually between 2003 and 2015. Still, the annual pension growth rate in Illinois was far greater than in larger states such as California’s annual growth rate of 6.6 percent. Other examples are Florida’s pensions which grew 5.6 percent, New York saw a 5 percent jump and Texas was up 4.9 percent.
|Since 1987, Illinois Benefits Have Soared 1,061 Percent|
From 1987 to 2003, pension benefits in Illinois grew at an uncontrollable yearly rate of 10.1 percent. We should note that small differences in growth rates add up to big amounts over years and decades, for example, the variance between 5 percent and 9 percent over a 30-year period can make the difference between a crisis and a stable situation. Consider how an 8.8 annual growth rate would affect average household incomes, over a 30-year period. In 1987, the median household income in Illinois was $27,084. If household incomes had grown at the same rate as state pension benefits they would have grown to $314,000 by 2016.
We were often led to believe pensions are a promise carved in stone, however, when the money is not there pensions and promises will be broken so pensioners should prepare for the pain. This is especially true in the public sector which has a history of granting pensions that are unheard of in the private sector. The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities. If Americans took the time to stand back and look at the bigger picture they will see the Pension Benefit Guaranty Corporation (PBGC) an independent agency of the United States government responsible for acting as the nation’s “safety net” for failed pensions is also in trouble. When a fund fails this agency is expected to take control of its assets and dole them out to its pensioners in the coming years. The ugly truth is the PBGC is not a rock and is in need of its own bailout. This so-called government agency “independent or not” has total liabilities of $164 billion with assets of only $88 billion.
Footnote; A prior article dealing with the issue of underfunded pension funds can be found below, also there is a link to an important article about where people store their wealth and savings.
H/T: Bruce Wilds