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| Pensions A Financial Time Bomb Waiting To Explode! |
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.
Joshua Gotbaum, former head of the PBGC from 2010 to 2014, voiced his unhappiness with Washington leaders failing to confront this reality when he said “No one wants to admit that pension benefits have to be cut, and therefore, in public, no one wants to be seen as supporting anything that cuts benefits. However, unless some benefits are cut, all are cut.” Several ways exist to cheat or rob those who paid into pensions for years. Pensions have been compared to a Ponzi scheme where benefits are paid out to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources. I fear the future will prove him mostly right. We are only beginning to see the tip of the iceberg when it comes to this growing problem and just how many of these schemes are underfunded. The fact this is not a problem only in America but it exists all over the world is an indication of how dire the situation is.
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.
http://brucewilds.blogspot.com/2015/04/pensions-and-promises-will-be-broken.html
http://brucewilds.blogspot.com/2017/02/where-wealth-is-stored.html
Illinois’ out-of-control pension crisis wasn’t inevitable. By simply growing at the more moderate pace of its neighbors since 2003, the state’s unfunded pension liability would be $40 billion to $85 billion lower today. The plain fact is that pension benefits have grown multiple times faster than the economy and is unsustainable. Clearly, Illinois' pension benefit growth must be reined in if the state is to avoid insolvency and a further exodus of its tax base. The financial problems of the state and increasing taxes are a large part of why Illinois has lost population four years in a row and is one of the nation’s leaders in outmigration. In 1987, Illinois households were on the hook for $4,300 in promised pension benefits. By 2016 that amount had exploded to over $43,000 per household.
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.
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.