With interest rates in the US falling to nearly zero, the fate of underfunded public pensions has only gotten worse.
The Pew Charitable Trust recently released their 2020 state pension report, The State Pension Funding Gap: 2018. The report is based upon 2018, the latest aggregated year of data collection.
At $1.24 trillion, the fifty-state pension funding gap—the difference between a state retirement system’s assets and its liabilities—improved slightly in 2018 with strong investment performance. However, the Pew report estimates that the aggregate pension funding gap has since increased by an additional $500 billion through March 2020 based on market pandemic losses.
The disparity between well-funded and underfunded state retirement systems is greater than it has ever been. As Table 1 below shows, in 2018 only seven states were 90 percent funded, while nine states were less than 60 percent funded.
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Table 1 – State Pension Funding in 2018
Lowering plan return targets and assumed discount rates can help reduce funding risk. Over the past five years, the average assumed rate of return for state pension fund investments has declined from 7.6 percent in 2014 to 7.2 percent in 2018. But we are now in a zero percent interest rate environment and more needs to be done. Public plan experts currently forecast long-term returns of around 6.5 percent for the typical public plan portfolio.
Some of the better funded states such as Tennessee and South Dakota have incorporated innovative cost-sharing features into their plan design, in addition to consistently making their full actuarial contributions annually.
Additionally, stress testing is emerging as an important risk management tool. Unfortunately, many states are currently poorly prepared for how an economic downturn can affect the costs of their retirement systems.
The fallback of asking taxpayers to make up the funding difference is simply not economically nor socially possible—not to even mention politically feasible—especially during the global health pandemic.
Article originally appeared here…
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