Study shows $1.2 trillion gap for public pensions
The actuarial firm Milliman finds that US public pension systems owe $300 billion more than reported.
By Hilary Russ
(Reuters) - The largest 100 public pension funds have around $1.2 trillion of unfunded liabilities, about $300 billion above the nearly $900 billion they reported themselves, according to a new actuarial study to be released on Monday.
The pension systems reported a median funding level of 75.1 percent. The study by the actuarial firm Milliman, which used different ways to value assets and measure liabilities, finds an aggregate level of funding of 67.8 percent.
But Milliman, one of the world largest actuarial firms took a close look at U.S. public pension funding for the first time, and said the multibillion-dollar difference was good news.
Rebecca Sielman, the report's author, said results should reassure the public that America's public pensions in general are accurately reporting their funding shortfalls.
The difference between what public pensions across the United States have reported and what Milliman found wasn't significant, Sielman said. She noted that a relatively small change in the way the figures are calculated could lead to seemingly outsized results because the funds are so large.
"The numbers really didn't change that much," she said. "It really didn't move the needle."
Both the pension funds' reported results and Milliman's findings fell within the range of previous estimates from other studies of the total size of the public pension shortfall in the United States.
With the study, Milliman, stepped into the debate about whether public pensions are underreporting the size of their liabilities.
That hot-button issue revolves around how much money public employers - and, by extension, taxpayers - will have to contribute to cover future payouts for member benefits. It is a key issue at a time of dwindling revenues and tighter budgets for states and local governments.
Pension funds get money from the returns on their assets and from members' contributions. States and cities also pay into the funds, but their contributions are discounted based on how much money they think their investments will make over time.
The 100 funds Milliman studied used a median rate of return for their investments of 8 percent. But the recession slashed into the market, dropping actual median returns to just 3.2 percent for the last five years, according to data from Callan Associates.
The difference has prompted critics to claim that the funds are underreporting their unfunded liabilities, or the gap between what they've promised to pay retirees in the future and what they'll actually have on hand to cover the benefits.
Critics have called for public pensions to reduce their assumed rates of return to as little as 5 percent or less, which would cause unfunded liabilities to soar and likely leave taxpayers having to cover the difference.
But without the change, critics say, future generations will be left to deal with a financial bomb.
FINDINGS WITHIN RANGE OF SIMILAR STUDIES
Other studies have tried to measure the overall size of the problem. The Pew Center on the States found that the shortfall is about $766 billion. Moody's Investors Service said in July that the collective gap would be $2.2 trillion if funds used a 5.5 percent discount rate.
Milliman has studied the health of the 100 largest private pension funds for about a decade. But this is its first study of public plans, conducted specifically to determine whether the systems were using unrealistically high return-rate assumptions as the critics claimed.
"I thought that we would find fairly pervasive use of interest rates that are high relative to current market consensus about future investment returns, and we didn't find that," Sielman said.
The firm, which has done actuarial work for nearly all of the U.S. states in the past, examined each individual fund in the study, using market valuations instead of smoothed valuations to measure assets and recalibrating liabilities based on Milliman's own benchmarks of expected long-term returns.
The firm found that the median discount rate should actually be 7.65 percent, rather than the 8 percent median rate the funds used in aggregate.
A third of the plans were using lower rates than they needed to, Milliman found, according to Sielman.
A small number of plans seriously underreported their liabilities because they use rates that are too low, Milliman found.
Milliman's study did not name the specific plans that underreported their liabilities. Sielman said the firm was not releasing its results for individual plans.
(Editing by Gary Hill)
(c) Copyright Thomson Reuters 2012.
It's not just public pensions that are in trouble. Years ago, mega corporations like GM promised workers ridiculously high pensions and health benefits to avoid strikes, knowing that this generosity would eventually bankrupt the company. Now the chickens have come home to roost, but of course the CEOs, union leaders, and politicians who created the mess are long gone, living very well, while Uncle Sam (taxpayers) is stuck with the bill.
Public sector workers have it too good. Pension? Ha, what's that? And those pensions weren't
earned through profits. They are funded with taxpayer money. Write the deficits off and distribute what's left accordingly. It's only fair; private sector workers only have 401ks, and are at the mercy of the financial markets and their investment decisions. If private sector workers' financial butts, figuratively speaking, are hanging out there naked so should the public sector workers'.
Pensions that were required by law to invest in only certain classes of investments (Those rated AAA and had very little risk) and they had been doing so as required by the law. Unfortunately, the law didn't cover S&P and other ratings agencies issuing AAA ratings to junk bonds/derivatives. So these faulty investment vehicles were sold to pension funds and when that market collapsed, so did many pension funds. Bear in mind as well that while these agencies were SELLING the funds to Pensions, they were knowingly betting against the same funds with their own money because they KNEW they were going to fail.
And so then did the cry for attacks on unions and pensioners because to fund these pensions properly requires a huge outlay of funds and people are up in arms about this.
So, be mad at the people who created this problem (Conservatives and their anti-regulation fervor and Wall Street and its anti-regulation lobbying) and support efforts to punish the people who actually destroyed the Economy as opposed to the normal people who are your policeman, fireman, teachers, etc who bear no responsibility at all for the collapse and have been working just as hard as you have for years and deserve their pensions.
YOU are being manipulated by the Banks and big Money. Your railing against unions and pensions is misguided and informed by your poor understanding of the market and the conditions that lead to this. You are getting fed information from the vary agencies that would benefit most by your support and when they benefit you most certainly WILL NOT.
Fight the plutocrats. Fight the congress that watches out ONLY for its own benefit and not yours. Count the number of Millionaires in congress and see how they vote continually for their own benefit at your expense. Make Wall Street pay for its manipulation of our market for its own benefit. Make Wall Street pay for the Fraud that has cost the economy TRILLIONS.
Voting Republican is just going to result in things for you getting worse... MUCH worse.
The definition of a "public worker" is one who ENTIRE income is confiscated from taxpayers and transferred to the public worker. The public worker performs a service but PRODUCES NOTHING.
Some, not many, services are worth the cost but nearly ALL could be replaced by private business and MOST could be totally eliminated and society as a whole would be better for it.
"Having had 5% of my salary witheld for over 35 years with the agreement and understanding that the state would also contribute a 5% matching contribution to the state employees retirement fund, I should, reasonably, expect a retirement pension that would provide for retirement as agreed 35 years earlier when I agreed to provide my services for state government."
There is rarely just one reason for anything to happen. American car makers lagging behind with smaller cars, refusing to take money out of profits to retool. Governments view on fair trade with an eye on supporting allies. We want future Americans to be able to breathe and have clean water. I agree that the UAW does not care about the IBEW, or loggers and mill workers. There is enough blame to go around for our unemployment situation. Do you know who the number one importer of soft wood products is? That would be us. Right across the road from me there is a log transfer yard. They load and move ten rail cars a day of straight 40 foot logs to be shipped to Asia, yet we import more soft wood lumber than any one else in the world. That my friend was not unions, but our trade policies. I am no great fan of unions. Case in point. A whole shipping port was shut down because the electrical union objected to longshormen plugging in refrigerated shipping containers. Ships were diverted, no trucks, not tugs. Nobody knows how to untangle the international politics from our unemployment issues. Our allies in Asia don't like China. The EU is a weeble wobble because people can't connect cause and effect. America is not much better in understanding that if we want goods to be made in the U.S.A. prices will go up. They will go up for a lot of reasons. Unions, energy, healthcare, pensions, cheap interest rates.
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Breaking up big banks is an untested solution to the too big to fail problem that attempts to isolate and dismantle large, troubled institutions while protecting the rest of the economy.
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