The Public Pension Crisis

Government workers at all levels are likely to have pension plans but there is a big question about the plans’ ability to pay.

According to the Bureau of Labor Statistics (BLS), 92% percent of full-time government employees like teachers and police officers are eligible for pensions, known as “defined benefit plans.”

According to the BLS about 22% of workers in the private sector have pensions, down from 42% in 1990.  In the private sector, retirement plans are much more likely to be 401(k) plans, known as “defined contribution plans.”  Part of the reason for this is that some large companies, like General Motors, accrued huge pension liabilities over the years that they were unable to pay.

Since the Federal Government can print money, federal employees are not worried.  However, states and municipalities depend on their tax base and can’t print money.  That’s where the problem comes in.  Some estimates claim the unfunded liability of public pension plans exceeded $3 trillion dollars.

According to Governing, the city of Chicago’s has an unfunded pension liability of almost $20,000 per capita.  Other cities are somewhat better off, but no big city has a fully funded pension account.  Dallas and Denver, for example are on the hook for between $8,000 and $9,000 per resident.  It’s difficult to even measure the amount of indebtedness because political leaders really don’t want to discuss it.

The problem has been exacerbated by rate-of-return assumptions that are unrealistic.  Most pension funds assume that their assets will grow at rates of seven to eight percent per year indefinitely, a virtual impossibility in this age of low interest rates and sluggish growth.

What does that mean for public employees?   They may want to cast a wary eye on Puerto Rico and some cities in California who have gone into default.  As a wise man once said, “something that can’t go on forever, won’t.”  A little planning ahead won’t hurt.

Whether you are a public employee or work in the private sector we welcome your inquiries.

 

 

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