“The elephant of unsustainable pension management has been sitting in the theater of retirement planning for at least two decades. Now it is taking center stage. As obligations have soared, contribution levels have not kept up and management has opted for increasingly risky bets in the hopes of ‘winning’ the funds needed. It’s not working.
Plans that were fully funded 20 years ago, today have maybe two-thirds of the capital needed to cover benefit promises– and that optimistic estimate assumes zero bear markets and fantastical average real returns of 7%+ a year going forward.
The reality of the pension crisis was underlined again last week when the board of the largest $330+ billion US public pension plan, California Public Employees Retirement System (CalLPERS), voted to shorten its period for amortizing future investment losses from 30 years to 20 years. After losing $100 billion in 2008, followed by 10 years of QE-enabled capital markets since, the fund still has not recovered.
The net effect is that state and local governments and agencies will have to further increase mandatory contributions by diverting tax revenues needed for education, health care, roads, environmental protection and other public services.
Solutions include lowering benefit payments and indexing, delaying retirement ages, increasing saving/contribution levels, and in some cases expunging obligations in bankruptcy. None of these are popular, but this is reality.”