(WSJ-paywall) Sums owed to retirees are accelerating faster than assets on hand to pay those future obligations
Maine’s public pension fund earned double-digit returns in six of the past nine years. Yet the Maine Public Employees Retirement System is still $2.9 billion short of what it needs to afford all future benefits to all retirees.

“If the market is doing better, where’s the money?” said one of these retirees, former game warden Daniel Tourtelotte.

The same pressures Maine faces are plaguing public retirement systems around the country. The pressures are coming from a slate of problems, and the longest bull market in U.S. history has failed to solve many of them.

There is a simple reason why pensions are in such rough shape: The amount owed to retirees is accelerating faster than assets on hand to pay those future obligations. Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up 30%, according to the most recent data from Boston College’s Center for Retirement Research.

Here is how it got that way:

The Financial Crisis Happened
Public pension funds have to pay benefits—their liabilities. They hold assets, which grow or shrink through a combination of investment gains or losses and contributions from employers and workers. Those assets generally rose faster than liabilities for five decades starting in the 1950s because government was expanding and the number of retirees was smaller.

In the 1980s and 1990s, double-digit stock and bond returns convinced governments they could afford widespread benefit increases.

Ten-year returns on core pension fund investments
Attached File


But the value of their holdings—their assets—began to fall in the aftermath of the dot-com bust in the 2000s, and the 2008 financial crisis followed soon after. State and local retirement systems lost 28% in 2008 and 2009, according to the Boston College data.

Liabilities and assets for major U.S. public pensions
Attached File


“The first thing you have to do is make up what you lost,” said Sandy Matheson, executive director of the Maine Public Employees Retirement System. “And it takes years. And then you have to make up what you didn’t earn on what you didn’t have. It’s a pretty steep climb.”

Governments Fell Behind on Their Payments
Cities and states set out to ramp up their yearly contributions to public pension funds as a way of making up for their investment losses.

Percentage of all state- and local-government spending on public
pensions
Attached File


Some were able to keep up with those payments. But others weren’t as they struggled with lower tax revenue and increased demand for government services in the aftermath of the 2008 crisis. New Jersey made less than 15% of its recommended pension payment from 2009 through 2012. It now has a little more than one-third of the cash it needs to pay future benefits—despite robust investment returns in recent years.

State Treasurer Elizabeth Maher Muoio said New Jersey is on “the long road to addressing our unfunded liability after years of neglect.”

Pensions and other long-term costs as a percentage of 2017 state revenues*
Attached File


“Some of the states allowed themselves to get so underfunded that the higher returns aren’t helping them enough,” said Michael Cembalest, chairman of market and investment strategy for the asset-management arm of JPMorgan Chase & Co. and the author of an annual study on the financial health of cities and states.

Pensions and other long-term costs as a percentage of 2016 city revenues*
Attached File


Some states, including New York, Wisconsin, Tennessee and South Dakota managed to keep assets roughly in line with liabilities through funding discipline, benefit cuts, or both.

Deeper Pension Cuts Didn’t Materialize
Many states and cities reduced benefits for new employees after 2008. But deeper cuts often met resistance from judges, unions and angry constituents—even in some of the most indebted states.

The Illinois Supreme Court in 2015 threw out cuts by the legislature that were expected to save tens of billions of dollars. Kentucky’s legislature last year declined to approve the governor’s proposed cuts to cost-of-living increases for retired teachers after protests brought thousands to the state capitol and forced cancellations of classes in several school districts.

Maine, which has made more progress than many plans in addressing its unfunded liability, did cut cost-of-living increases for both retired and active state workers. They earn a median pension of $27,000 after 25 or more years’ service and don’t receive Social Security. But that cut shaved only $1.6 billion off the fund’s unfunded liability, which now stands at $2.9 billion.

People Got Older
Demographics became another problem as baby boomers aged. The number of pensioners jumped thanks to longer lifespans and a wave of retirees over the past decade, while the number of active workers remained relatively stable.

Maine’s fund serves about the same number of active workers that it did in 2008—a little more than 51,000—while the number of retirees has jumped 32% to about 45,000. Many funds are experiencing the same trend.

That pattern contributes to an increasing gap between pension fund inflows and outflows—before the funds earn a dollar on investments. Maine’s pension fund paid $982 million in benefits in 2018, $394 million more than the contributions it took in. For a plan trying to improve its funding status, that type of gap makes it harder to recover from investment losses.

The Future Looks Worse
Many public pension funds have benefited from the 10-year-long bull market. But now many are lowering their predictions of what they can earn in the future. That accounting change makes their liabilities look even larger, portending more strain in the coming decades.

The Maine pension fund, which back in the early 1980s assumed a long-term investment return of 10%, now assumes a rate of 6.75%. If that rate were just 1 percentage point higher—where it was about 10 years ago—the projected $2.9 billion shortfall, most of which must be paid off over the next decade, would drop by more than half to $1.1 billion.

The decision to lower the rate was based on discussions with the fund’s actuarial and investment consultants and a goal of keeping costs predictable, said Ms. Matheson, the system’s executive director. “There’s also an element of better safe than sorry.”

Shiller P/E indicates the next ten years won't be nearly as good as the last 10 years.  The plan advisors are correct to lower projected payouts.

One of the big problems with pensions is they force payouts in down years.  People who use them often brag about the fact the pension keeps paying even when the markets are down - but the reality is those continued payouts can break the pension quickly if it's not fully funded.

Repeat after me

PUBLIC PENSIONS ARE A SCAM

PUBLIC PENSIONS ARE A SCAM

PUBLIC PENSIONS ARE A SCAM

Throw on top of that, they didn't put enough into the system to begin with and you have a disaster.

This is the real issue.  Properly funded pensions are expensive.  Politicians like to promise more than they can pay and it catches up with them in time.

The problem with market statistics is the really don't factor in the down years or pull backs.

Real equity market returns since 2000 are around 4.2%.

The classic example is this:

Start with $100

next year return is down 50%; account balance = $50

next year return is up 50%: account balance = $75

Average return = 0%; account balance is down 25%

Pension funds have never used realistic figures when calculating returns or payouts.  They are Ponzi schemes for the most part.  The tax payers are the ones that lose, and are expect to handle the bailouts.

pensions lol

It's eating the budget for the schools.
Every year more and more goes to feed the PERS scam.
Mike Bellotti pulls something like 40K a month in PERS retirement.
U of O football coach.
Got to use every other penny he made to boost his retirement, speaking fees, tv money.
It's a fucking scam set up by government stooges to pay off their supporters, the unions.

Those are actually a ponzi scheme with taxpayers on the bottom.

Breathe. You'll be ok.

That happens when you start at a shiller P/E near 41.  Even today we haven't reached valuations that high again.

Boo fucking hoo! I bet it still outperforms the scam social security system the rest of us are forced to fund.

Cut their payouts. It's a big shit sandwich and it's their turn for a bite....

You mean the same politicians and bureaucrats that mismanage and steal our money steal from public employees too?

No

Fed pension?

Math just is.

More importantly, sequence of return risk...

retirees are living much longer than before, the days of retiring at 65 and dying at 72 have been replaced with retiring at 65 and dying at 90.

Low interest rates hurt too, tremendously.  Pensions cannot be invested solely in stocks; they rely on a certain level of interest income that we haven't seen in over 10 years.

Actually, private pensions were forced to use more realistic return assumptions. GAAP requires private sector pensions to discount on bond yields, not market returns.

Solution is easy.  When there isn't enough pension money, the old people form the circle and fight to the death.  The victors get their pensions.  The vanquished go to Valhalla.  Everyone wins.

I saw a post from Illinois Policy on FB the other day.  They claim Gov Jelly Belly Pringles proposed 3.4 billion dollar tax increase (largest in history) can only fund state pensions for 4 months.

And that is if Illinois doesn't get dropped to junk bond status which the bond ratings people are threatening to do by the end of this year.  If IL gets dropped to junk then this state is going to end up being detroit.  Want to know how corrupt things are in IL?  The IL State Supreme Court ruled a former union employee who worked a single day in the classroom is eligible to receive a decade’s worth of teacher pension benefits.

DAMN YOU MODERN MEDICAL TECHNOLOGY!!!1!!1!

Well, yes, there is that.

It also has to do with better nutrition, but more importantly it also implicates Americans morbid fear of death.

FFS, if you're 85yo and have three terminal diseases, go to fucking hospice and die with dignity, don't make the taxpayers spend $1,000,000 of Medicare-money to eke out another six months of life.  If you haven't achieved all you wanted to achieve in life by age 85, you ain't gonna do it by age 86 either.

I'd like to live to 120. I'm setting back money accordingly.

No one wants to seem to support their employees anyway.

Dallas was losing police (and still is) faster than they can replace them, yet the mayor votes against raising their salary to compete with the suburbs. Instead he's out trying to get bonds to build more parks in flood plains and bridges that aren't built correctly and never open. I think on the backend, you're seeing kickbacks on real estate deals.

Houston is just flat out closing fire stations and laying off firemen. Nevermind the social agendas.

Property appraisals (and now property taxes) are nearly doubling in Texas right now. All these fuckers should be flush with cash. Where is the money going? Roads? Can't seem to keep the front end aligned on my truck because are roads are so shitty.

This is why I don't care if they are failing.

Hell no! Mi-Ma is gonna live!

In the 1980s and 1990s, double-digit stock and bond returns convinced governments they could afford widespread benefit increases.

So what you are saying is that corrupt politicians promised and gave more in order to get and keep votes.

FOX reported that 50% of all healthcare costs are spent on just 5% of the people.
Logan's Run Bitches!

You're missing the bigger picture.  If grandma dies her worthless spawn can no longer steal her social security checks.

Public pensions are a scam.

End Social Security, but especially end welfare, end Section 8, and all of those social welfare programs.  It's breeding our own Visigoths, Vandals, and other tribes that will destroy Western Civilization.

This is why you should care.

Attached File

Pensions backed by tax dollars shouldn't fucking exist. Neither should public sector unions.

 Long bull barrels not selling well...................

Not the markets fualt. all blame can be dropped on politicians heads.

The bull market was never intended to fix public pensions or any other pensions.

The bull market is the birthchild of the Greenspan Put and then Fed Res QE policy.  For those who were in equity or real property, they got richer on paper. For those without those assets, they got poorer.  QE allows us to export inflation while, because of the dollar being the world's reserve currency, a cushion insulating us from it.

Virtually all pension funds are in trouble.  The pension managers had to get into riskier investments so as to meet their obligations to their pensioners.  I know CalPers dumped a huge chunk of change recently into more risky things.

Disagree

Illinois has prevented this by having a state constitutional provision that state pensions can never be cut.  So there, problem fixed!!  I encourage all other states and municipalities to follow Illinois' example.

The next recession, whenever it happens, is going to be brutal and break the pension system

Yet people scream "Death Panel" if someone is denied every possible procedure......

Public sector unions shouldn't be allowed to endorse candidates - it's a conflict of interest.

Endorsements & contributions should be from individuals that can vote for the office/initiative - ie people from Florida can't contribute to or endorse Dianne Feinstein.

that's because thanks to comprehensive health insurance, Americans have adopted the mentality that they are entitled to every possible procedure, and it's up to the insurer to justify denying it.

UT Firefighters, teachers, cops, other public sector workers pension fund steady long-term growth

I'm sure if we allow more cancerous politicians to get elected, they'll fix that for us too.

I'm not a big fan of giant public union sectors, especially in schooling.

We get a net negative product once kids graduate high school, then are on the hook for the facilitators continued salaries even after they quit working.

What a racket.  As a small business owner, I get to finance it all.

They are investing in shit.
Probably corrupt.

65? Hell, I am out with my 50% at 44.....Figure I better get while the gettin' is good.

Laughs in maxed out 401k and Roth

Maybe that whole death panel thing...

Muh boomers.

I have a better idea:  When retirees reach age 72, they get herded into the gas chambers.

Bad investment prospects build shitty retirement funds.