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 MSN Money Partner Oct 15, 2012 8:39AM

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.




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.

Oct 15, 2012 12:53PM
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.  With reasonable management of the retirement fund investments and fulfillment of the obligation by the state to their contributions, there should now be no reason for a state retirement fund to be underfunded.  However, when unscrupulous politicians with little to no integrity fail to maintain obligations and choose to spend more money than the government for which they have been given responsibilty to manage has, then the systems will fail, no matter how well they may have been managed by the professionals employed to perform the services required for pension fund management, or for that matter, any other state government service.
Oct 15, 2012 12:32PM
More government incompetence. The lack of supervision allows such nonsensical reliance on unreliable return assumptions with no periodic mandatory adjustments. Irresponsibility at its worse. Of course, this mirrors the chaos and absurdity within the Social Security system. And to think we are asked to trust government operation of national health care when they do such a terrible job with the above as well as the Veteran's Administration. Where is the regulatory mandates as the the governnment requires on banks, insurance companies, etc. Yup, just like most everything else, they don't require the same thing of  themselves.  
Oct 15, 2012 3:13PM
The good ole Federal Reserve System, lower interest rates to below zero, steal from savers and pensioners, devalue the currency, lower purchasing power, create huge deficits then mask it with the endless printing of fiat currency in the form of stimuluses. This is what happens when an out of control government has an unlimited printing press, practices 'fractional banking' and racks up all the debt it wants by taxing the people in the form of income taxes and anything else it can think of. This is why everything in this God forsaken country is insolvent and about to implode on itself.
Oct 15, 2012 2:27PM

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.



Oct 15, 2012 12:34PM

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'.

Oct 15, 2012 4:47PM
Where is all the personal money that federal and other public employees paid into their retirement/pensions for 30, 40 years???  why are these pensions retirement funds NOW called unfunded liabilities???  What happened to  the money that was mostly private money  (NOT taxpayer money)?????
Oct 15, 2012 4:46PM
Bet the politicians will make sure that they are fully funded first...
Oct 15, 2012 2:32PM
If you opted for a great pension for years of service that is fine, but in the public sector you then cannot expect high wages similar to private sector jobs. If you want to roll the dice, pay me great now, and I will secure my future. Your choice.
Oct 15, 2012 12:25PM
Public employees should pay into SS like the rest of us.  Everybody should pay into SS  and retire at same age.. Demos screw things  up.
Oct 15, 2012 11:46AM
Question; say the USA defaults next year.... can they just right it all off and say sorry about your luck?  I know the state level ones are a different matter but the federal ones?
Oct 15, 2012 3:29PM
so, a 33% error, or differential, does not move the needle.  $300 billion is now "trivial"--what a jerk!!
Oct 15, 2012 1:39PM
Many of you are not really aware of the reasons for pension underfunding.  Pensions were well funded until Wall Street and the Ratings Agencies LIED to the institutional investors who manage the pensions.   

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.
Oct 15, 2012 2:12PM
My husband has worked for a state government for over 32 years. He has never NOT paid into social security and the thoughts that someone would wish him ill will just makes my stomach roll. He has had no say in the amount withheld each pay, no input into the investment selection and if he's not getting anything out of it then the state should give him the full amount he contributed so he can at least take that and invest it in something that may give a small return. Where do you people come from that are so anti-america? It's the "if its not effecting me I dont care" attitude that is ruining this once great country.
Oct 15, 2012 2:13PM
Well, what do you expect, really?  That's what you all get. You can't work for 25 - 30 years, retire in your mid 50's and early 60's, and than on top of that collect for another 40 - 50 years, 2/3 of the salary you were receiving and on top of that have healthcare for life.  Those deals were made because the average person died in their 60's and 70's thirty years ago, and it was a benefit to the state, the employees, and everyone surrounding it.  Now,  People living to their nineties, expect to still collect a pension, 40 years after the fact, and most had only payed into their pensions for 20 - 30 years.
Oct 15, 2012 3:14PM

Hey histerical1

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.

Oct 15, 2012 3:55PM

Just another example of the average American taking in the ...

Oct 15, 2012 2:07PM

"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."



Promises, Promises....

Oct 15, 2012 2:55PM
I would call it frustration, not envy, because of the prospect private workers (as taxpayers) having to pay in amounts not aligned with the economic reality. That, and/or high inflation that will hit private workers more. I don't see the same attitude when discussing the benefits of this vs that private company. 
Oct 15, 2012 2:34PM

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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