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Public Pension Funding Shortfalls

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I stated in “Will You Need to Work Until 70?” [4] that ever increasing levels of government debt may cause problems for those expecting pension benefits from public sector employment.

I read an article today that reinforces my view. 

U.S. Public Pensions are Inadequately Funded

According to Reuters [5], state pension plans are inadequately funded.

A survey by Loop Capital Markets found only 58 of 149 state-level public pension plans it reviewed were funded at 80 percent or more, a level that is considered healthy.

61% of the plans reviewed are not in good health. Note that good health is only considered 80% fully funded. I guess if I amputate an arm, I am still healthy as I have 3 of 4 appendages in place.

The Takeaway

Whether you work for the State of Hawaii or a private company in Switzerland, it does not matter.

You always need to monitor the health of any pension plan of which you are a member.

Never blindly assume that what you think you will receive upon retirement at some future date is what you will actually receive. If the plan is seriously underfunded, the plan sponsor gets into financial difficulty, actual plan investment returns do not meet assumptions, etc., you may not receive what you expect.

I would also review the assumptions being used in pension calculations. If the pension is assuming annual portfolio returns of 10% and it is only earning 3%, there will be a shortfall based on accumulated performance. Interesting assumptions are always integral to less than stellar pension plans.

For a pension plan with funding and assumption issues, see this biting analysis of CalPERs [6].

As an aside, this is a key reason I prefer fully funded defined contribution pension plans over defined benefit plans. It is better to know what is actually in your pension plan than having to rely on a promise for a future income stream that may or may not be possible.

If you do see that your employee pension plan has issues, do what you can to make management get funding back to acceptable levels. You may not have much leverage, but make your voice heard.

And, to the greatest extent possible, increase contributions to any personal retirement accounts. This may provide some protection should the employee pension face cash flow shortages and you start receiving less than you planned for.