I’ve been writing and talking about underfunded pensions for a decade. More recently, I’ve been saying underfunded pensions could be the next big crisis.
Well, it’s getting worse.
There’s been a failure at all levels to truly tackle this issue, and frankly, the people who will be hurt most are the folks who contributed for years, expecting their pension to be there (in full) in retirement.
A pension is a defined-benefit plan, which means the plan sponsor delivers a benefit to plan members that is predetermined by a formula. The exact amount is often based on length of service, salary history and more.
Pensions are often sponsored by state and local governments, labor unions, and an ever-decreasing number of private companies. These entities simply haven’t set aside enough to pay the benefits promised to current and future retirees.
The firms think they have years to make up the shortfalls. But a repeated pattern is a habit, and right now, sponsors are underfunding these plans. That can (and probably will) continue, but eventually the piper comes calling – and I can hear him warming up.
Research from Stanford University estimates that underfunded public pension liabilities amount to almost $5 trillion, or about 20 percent of our national debt. This poses quite a challenge for retirees counting on their pensions.
The writing on the wall seems to be that pensioners should prepare for less benefits, taxpayers might see higher tax bills, and citizens could see services cut. That’s not exactly what people were promised.
This situation occurred because plan investment return assumptions are simply too high, sometimes reaching 8 percent or more. If they were more conservative, funding would increase.
Again, the piper is warming up. How bad will we let this future headache get?