Pension Programs at Risk in the United States
Pension funds across the United States are severely underfunded. This means they have more liabilities than they have assets, and they cannot meet their financial obligations.
For example, the New York State Teamsters Conference Pension and Retirement Fund just approved a reduction in benefits to its members because the fund doesn’t have enough money to cover what it initially promised to retirees. On January 1, 2017, the pension fund was only 37.8% funded; it had $3.39 billion in liabilities but only $1.28 billion in assets. (Source: “New York State Teamsters pension fund cuts approved,” Pension & Investments, September 13, 2017.)
Some 29% of the Teamsters pension fund’s retirees and 19% of active participants will see their benefits reduced. If this new plan wasn’t implemented, the fund would have been insolvent by 2025.
The Colorado state pension fund is also talking about cutting benefits and increasing contributions significantly, in order to remain afloat. That pension program is 58.1% funded. In 2010, it was 64.7% funded. It now has $32.2 billion in unfunded liabilities. According to projections, if nothing changes, it would take 78 years to pay off the pension’s unfunded liabilities. (Source: “Lower PERA benefits, higher taxpayer and worker contributions proposed to close Colorado pension system’s $32 billion gap,” The Denver Post, September 22, 2017.)
Dear reader, as much as I don’t want to be the bearer of bad news, this is just the beginning when it comes to pension funds reducing what they pay out. Many pension funds hold bonds in their portfolios and, with interest rates being so low the past few years, the income from bonds hasn’t been enough to pay out benefits. That means pension funds have ended up paying benefits from the new contributions they receive.
When the analysts at these retirement funds originally made their projections 20 years ago, interest rates were a lot higher than they are today. Hence, typical employees with pension plans at companies back then were told that they would receive X dollars per month when they retired. But, following the Credit Crisis of 2008, interest rates collapsed and there hasn’t been enough money coming into the funds to honor their promises.
The result is that the poor pensioner now gets less. (No wonder the U.S. hasn’t been able to hit gross domestic product (GDP) growth of more than three percent for years now.)
Now, here is the double-edged sword.
Interest rates are expected to go higher. In the U.S., the Federal Reserve is expecting interest rates to be around three percent by 2019. This is going to impact bonds negatively; higher interest rates will push down the value of bonds that many pension funds have in their portfolios. That means pension funds will, all of a sudden, find themselves with fewer assets than before.
Sadly, the future for the millions of Americans who depend on their old company’s pension fund for income doesn’t look good.