The growing pension black hole is pulling us all in

The growing pension black hole is pulling us all in
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Public and private pension sinkholes are showing up all over the country, and we’re tumbling in. In Pittsburgh last week, benefit cuts of 30 percent were announced for 21,000 retirees from UPS and other shipping companies.

When Sears Roebuck filed for bankruptcy in October, its pension plan was revealed to be $1.5 billion short of what was needed to cover its retirees. Some of this will be covered by the government, but not all of it.

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Public pensions aren’t immune from sinkholes either: Over 100 California city and municipal governments just asked voters for tax hikes seeking help to pay for long-term pension underfunding, on top of 36 similar requests already made earlier this year.

Kentucky’s public pension underfunding was the subject of a recent and damning Frontline report, and massive shortfalls in Illinois’ state pensions have dominated the election news, with no easy fix in sight. 

Lest we forget, our nation’s basic retirement security pillar, Social Security, is also heading for the tank. Fifteen years from now, it will require benefit cuts of 28 percent or payroll-tax increases of at least 60 percent to stay in business. 

Digging holes deeper and faster

Plenty of folks bear the responsibility for this gloomy state of affairs. For years, particularly in municipal and state plans, employers and employees paid too little in contributions to meet accrued benefits. Accounting and actuarial rules allowed both public and private pensions to avoid reporting their actual state of poor health.

Seeking to get lucky with risky investments, pension sponsors have increasingly moved to hedge funds, private equity and infrastructure holdings, often without full knowledge of how much these nonstandard investments cost and how risky they are. 

Meanwhile, taxpayers and plan members often have trouble finding out how badly off their pensions really are. Public plans are supposed to make available their Comprehensive Annual Financial Reports (CAFRs), but often they do not.

After years of sleuthing, a Stanford study estimates that the public plan black hole is now almost $5 trillion. In the private sector, pensions are required by law to submit information online, but here too, the information can be difficult to interpret and may involve averaging asset values rather than reporting actual market values of assets.

Figuring out Social Security’s prospective underfunding also takes digging — it’s parked back on page 200 of the Trustees’ report, where we learn that it amounts to a staggering $34.3 trillion, or almost twice the entire U.S. GDP.   

Policymakers must be better informed — and required to act

Just as gravity from a celestial black hole attracts and obliterates nearby objects, it’s looking like the revenue requirements of our national pension black holes may also suck dry our city, state and national tax revenues.

To make better decisions, here’s what policymakers need:

  • Public pensions should post their financial reports online right after their fiscal year ends. These should be easy to find and presented in a searchable format These accounts should employ transparent accounting and be audited by an independent CPA firm.
  • Underfunding numbers should be reported not only in aggregate, but also per capita, so people understand how big the black holes are.
  • States and municipalities should report their net positions in a timely way, without hiding "deferred" items like pension costs to be dealt with later.
  • Pension providers and politicians should be restricted from offering additional benefits until their past promises are adequately funded.

What about those hoping to get retirement benefits?

For individuals and their families, here are a few ideas that can help:

  • Understand that your pension and Social Security are not fully guaranteed. Most of us will get something, but all of us face benefit haircuts, which could be large.
  • Delay retirement as late as possible. This reduces the period over which assets are drawn down, and it also boosts benefits quite substantially. For instance, Social Security benefits are 76-percent higher if claimed at age 70 instead of age 62.
  • Don’t retire completely if possible. Part-time work can help stretch out old-age resources substantially. Working longer can also keep people healthier.
  • Cut spending as soon as possible. Money saved now is money that will make old age easier, covering medical care, nursing home care or simply daily living.

People sometimes call economics the "dismal science," since economists dig into dark places for stories of poor incentives and misbehavior. Yet, it is critical that our aging nation stop ignoring these pension black holes.

Our leaders, both public and private, must be reminded of their mandate to protect the nation’s security — including its retirement security. 

Olivia S. Mitchell is an economist who has worked on pension and Social Security reform around the world for four decades. She teaches at the University of Pennsylvania.