Public pension plans lost a median 13.2% in the three months ended March 31 the biggest one-quarter drop in the 40 years the firm has been tracking, driving up already-burdensome retirement costs for governments.
“There will be a lot of pressure to cut benefits,” said Don Boyd, co-director of the State and Local Government Finance Project at the University at Albany’s Rockefeller College, University at Albany in New York. of Public Affairs.
State and local governments “are trying to figure out how to not cut school aid too deeply, not cut Medicaid too deeply, not raise taxes,” Mr. Boyd said. “Pension contributions are pretty far down the list of things they want to pay for.”
Pension checks come from a combination of money set aside by government employers, money from employee paychecks, and investment returns earned on that money. When investment returns fall short, it typically falls to governments to allocate more of their revenues to make up the balance.
Even before the record first-quarter losses, public pension plans were $4.1 trillion short of the $8.9 trillion they will need to cover promised future benefits, according to the Federal Reserve.
Decades of overoptimistic return assumptions, insufficient pension-fund contributions and lengthening lifespans created massive shortfalls in public pension funds that the 11-year bull market didn’t cure.
Over the past decade, public pensions had ramped up stockholdings and other risky investments in an effort to meet aggressive return targets that average around 7%.
For the 20 years ended March 31, public pension-plan returns have fallen short of that target, however, returning a median 5.2%.
Since the last recession 10 years ago, governments around the country have jacked up their yearly pension contributions and slashed benefits for new hires, sometimes shifting the employees to 401(k)-type plans that don’t promise more than investments can earn.
Some pension benefits promised to workers, such as cost-of-living increases, also have been cut, but courts have generally blocked cuts for people who have already been hired.
But record underemployment means that pension-fund holdings could continue to be eroded even in the event of a full market recovery.
Municipal governments could have difficulty making their annual pension contributions if they face significant drop-offs in revenue i.e. taxes on sales and income, that are falling sharply amid a deteriorating economy and record unemployment.
In April, Senate Majority Leader Mitch McConnell, a Republican who represents Kentucky, floated the idea of giving states the ability to declare bankruptcy, saying he doesn’t want to see funding from a coronavirus aid package that increases the national debt being used to bail out underfunded pensions.
PS: (1) Kentucky has one of the worst-funded state pension plans in the nation.
PS: (2) May 16th – Reason Foundation: New York City’s pension debt could push it bankruptcy with 75% of its $178.8 billion deficit due to pension and other retirement liabilities.