View Full Version : A REAL problem - unfunded pension and health liabilities
With all the distractions from the real issues that genuinely impact citizens in North America and other developed nations, it is way past time to examine how we will respond to a real problem - unfunded pension and health liabilities. Talk about a need for simple living! It is not a warm fuzzy and we do need to make plans.
Taxpayers are in this together. How are you going to fund your future with a reduced pension and higher taxes? I have included Canadian info on these international issues but also sharing the US at this time.
Pension Liabilities
Check out http://pensiontsunami.com for updated info.
From John Mauldin http://www.mauldineconomics.com/frontlinethoughts/pension-storm-warning - "this issue is going to set neighbor against neighbor and retirees against taxpayers."
"The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion."
From the Canadian Federation of Independent Business:
CD Howe Institute’s yardstick https://www.cfib-fcei.ca/cfib-documents/rr3262.pdf on modifying assumed rates of return, it is not unreasonable to suggest that combined federal and provincial net unfunded liabilities in Canada nears the $300 billion mark. If one attempts to include the broader public sector plans, we may be dealing with true unfunded liabilities well above that. The amounts are not trivial—a $300 billion unfunded liability scenario is equivalent to about $9,000 per capita or $100,000 per government employee plan member.
Healthcare Liabilities
In the US alone (Source Patrick Watson of Mauldin Economics) - Starting in 2018, the Governmental Accounting Standards Board—the source of generally accepted accounting principles (GAAP) for state and local governments—will force officials to record healthcare liabilities on their balance sheets. Pew Charitable Trusts estimates the national shortfall will add up to $645 billion...
Fraser Institute - " [In Canadian provinces,] health care spending is expected to consume a slightly larger portion of total program spending—growing from 40.1 percent in 2016 to 42.6 percent in 2031. The range of results for specific provinces is a low of 34.2 percent in Quebec to a high of 47.2 percent in British Columbia in 2031. As well, health spending in total is expected to grow from 7.3 percent of the economy in 2016 to 9.3 percent in 2031. Health care spending in four provinces (British Columbia, Prince Edward Island, Ontario and Nova Scotia) is projected to consume over 45 percent of total program spending—suggesting increases in spending along these lines may be unsustainable and carry some risk of crowding out other programs or requiring fiscal adjustments."
Opioid drug abuse
A recent Reuters investigation found costs soaring for everything from ambulances to autopsies. Cities and counties are racking up huge bills for courts, prosecutors and public defenders, jails, and treatment programs.
The small towns and counties dealing with this opioid plague are often the same ones whose pension plans and healthcare expenses are already underfunded.
That’s bad news for current retirees, workers who hope to retire, and taxpayers who will ultimately foot the bill. In a word, everyone.
I see public pension liabilities as a big and painful problem for the near future. How to balance the interests of public retirees who were promised (however unrealistically) a certain benefit, against taxpayers with no pension coverage being asked to bail them out. Several years ago, the Wisconsin legislature was debating a bill that would (among other things) require public employees to pay for half the annual contribution to the Wisconsin Retirement System (typically 6-7% of salary impact for most categories). Many public servants assumed the public in general would find this to be outrageous. The public in general turned out to be less interested in paying more for a pension for somebody else than predicted. Especially when they had no similar retirement plan available to them.
State and local governments all around the US have some painful choices ahead of them. I feel extremely fortunate to be participating in one of the few fully funded plans in the country.
gimmethesimplelife
9-26-17, 2:33pm
Honestly? I see an exodus coming of Americans, and perhaps other nationalities, applying for retirement visas in the safer inexpensive third world countries. It's such a practical way around so many issues - affordable health care and deeply reduced living costs.....things are getting to the point where soon something is going to have to give and this is a way around the system. Just my seventeen cents worth. Rob
Williamsmith
9-26-17, 2:37pm
My plan is fully funded as it is a unique individually regulated pension plan but it resides under the umbrella of a much larger state pension plan which is decidedly grossly underfunded. It is not grossly underfunded because of unrealistic promises. It is grossly underfunded because the governor back before the crash of 2008 was so impressed with the high yields of the market that he diverted the agreed upon payments to the fund in order to spend money on other government programs. He basically stole it from retirees. Then of course when the investments didn't meet expectations the shortfalls could never be made up.
Now, nobody cares so much about the history of it all as much as how in tar nation are we going to pay for it? Well, there are now two ways. Raise taxes in a Commonwealth whose tax base in dwindling every day or borrow it. For now they are satisfied with borrowing. Mathematics say some day the lenders will insist on such a high interest rate that will no longer be feasible, neither will taxation nor government Belt tightening. When they come after pensioners, that will be the fight or flight moment. It will not be pretty but I hope to be long gone before then. If not, I believe I can live a subsistence level existence however bitter that may be.
Honestly? I see an exodus coming of Americans, and perhaps other nationalities, applying for retirement visas in the safer inexpensive third world countries. It's such a practical way around so many issues - affordable health care and deeply reduced living costs.....things are getting to the point where soon something is going to have to give and this is a way around the system. Just my seventeen cents worth. Rob
It will probably take more than $0.17 to get one of those magical visas. I understand Mexico wants evidence you have income of a couple of thousand bucks per month. I would also think a large influx of superfluous Americans might generate a certain amount of resentment in the host countries.
gimmethesimplelife
9-26-17, 2:50pm
It will probably take more than $0.17 to get one of those magical visas. I understand Mexico wants evidence you have income of a couple of thousand bucks per month. I would also think a large influx of superfluous Americans might generate a certain amount of resentment in the host countries.There are countries much easier to get the visa for than Mexico. Columbia for example, which is much safer than it once was and where Medellin is actually starting to become a bit of an affordable retirement destination for those who do their research and have an open mind and loyalty to their quality of life. Columbia is only one such example - there are many others. In SE Asia, Thailand would be an example - though the requirements financially are not all that high, they are getting weird about things in other ways such as wanting to know your social media information. Rob
ApatheticNoMore
9-26-17, 3:00pm
The best answer is probably just increase social security for everyone and maybe pensions won't matter so much, I mean I don't have a solution to make the pensions all solvent, so better just to focus on keeping old people from starving on the streets which actually is possible (fixing bad pension investments not so much so ..).
Having a pension is such a baby boomer issue to worry about, but really none of us wants old people on the streets etc. so making sure social security pays enough to live on takes care of people with and without (insolvent) pensions.
Is Social Security in such great fiscal shape that we should rely on it to replace other retirement systems? I don't suppose you need to worry about funded status when all you need to do is write yourself another IOU.
Gimme, you are deluding yourself if you really believe that resources that are no longer available in the developed countries will be there in the more undeveloped countries. The undeveloped's revenue is coming from the purchases by the developed countries buying their goods or employing their workers to produce them. Lower demand means lower need for a supply and less need for the workers who are relying on those jobs. There is nowhere to go that will survive this economic crisis. Europe is going to face it with all their pension commitments.
Unlike WS, I expect to be here as it comes into effect. Already, local steelworkers have had their pensions severely reduced as part of the debt restructuring.
A company can go bankrupt, have its assets reassigned at so many cents on the dollar and everyone gets a bit. Governments cannot be sold for their assets to be disposed to cover their liabilities. It is either the taxpayer or the pensioner or the taxpaying pensioner who gets the biggest hit.
I have been watching the US discussions about tax reform and have heard nothing beyond how to reduce the highest tax rate. Nothing about the impending pension and health benefits liabilities. Have you?
Williamsmith
9-26-17, 4:11pm
The best answer is probably just increase social security for everyone and maybe pensions won't matter so much, I mean I don't have a solution to make the pensions all solvent, so better just to focus on keeping old people from starving on the streets which actually is possible (fixing bad pension investments not so much so ..).
Having a pension is such a baby boomer issue to worry about, but really none of us wants old people on the streets etc. so making sure social security pays enough to live on takes care of people with and without (insolvent) pensions.
Except that my career choice caused me to have a 25 year gap in social security deductions. As well, my pension plan makes me ineligible for 60% of any social security benefit I could even qualify for. After meeting my minimum requirement of 40 quarters, I can expect to collect $50 per month in social security.
Williamsmith
9-26-17, 4:15pm
It will probably take more than $0.17 to get one of those magical visas. I understand Mexico wants evidence you have income of a couple of thousand bucks per month. I would also think a large influx of superfluous Americans might generate a certain amount of resentment in the host countries.
"Contruye esa pared!!" And they will make the United States pay for it.
Teacher Terry
9-26-17, 7:52pm
WS: I am in the same boat as you in regard to SS.
There is no Utopia. When I was in Thailand the water and air (1998) were very polluted. We were told in a very fancy hotel to brush our teeth with bottled water from India. Poland is a nice, cheap country but they heat with coal so air polluted all winter. Many cheap places are hot, humid, tons of bugs, etc. My personal idea of hell. Many people do not want to leave their family & friends. Nevada's pension is not 100% funded but better than many. We would cut out the traveling, eating out etc if ours were cut.
Williamsmith
9-26-17, 9:06pm
WS: I am in the same boat as you in regard to SS.
There is no Utopia. When I was in Thailand the water and air (1998) were very polluted. We were told in a very fancy hotel to brush our teeth with bottled water from India. Poland is a nice, cheap country but they heat with coal so air polluted all winter. Many cheap places are hot, humid, tons of bugs, etc. My personal idea of hell. Many people do not want to leave their family & friends. Nevada's pension is not 100% funded but better than many. We would cut out the traveling, eating out etc if ours were cut.
Terry, I was thinking more on the lines of a smallish cabin, a wood fired stove, two five gallon buckets providing water from a nearby spring, a few chickens, a few rabbits, some yearly venison, canned vegetables, no television, a shelf of books, a guitar, a camera and a notebook. And something with which to fire a warning shot.
Teacher Terry
9-26-17, 9:28pm
WS: I was assuming we would keep some of our pensions:)) If not we will be joining you. We could also sell our home and buy a small condo to get some more $.
Williamsmith
9-26-17, 9:41pm
Terry, I have a friend who has a daughter working as an actuary for a major insurance company. She said that police officers were ranked as one of the most stressful jobs and as such a limiting factor on lifespan due to the fact that cancer, heart disease and mental health issues as well as complications from addictions tend to on average shorten a retirees life by seven to fifteen years.
My pension was funded fully for seventeen years after my retirement. That means at age 68, I am expected to be dead. Therefore, I am not too worried about the SS payments, I probably won't be around to collect anyway.
Teacher Terry
9-26-17, 10:24pm
Police, firefighters and prison guards all have shorter life spans from their jobs. That is the reason they can retire younger with less years then other public workers. Also the fact that all these jobs go from 0-100 as far as adrenaline rush is very harmful to the body. I learned about this in grad school since we would be helping people with employment decisions.
WS: I hope you have a long, healthy life and they lose $.
Williamsmith
9-26-17, 10:35pm
Terry, that was kind of you to say. And you as well.
ApatheticNoMore
9-27-17, 12:43am
oh everyone who has worked the necessary years should be eligible for social security there shouldn't be any exceptions, there are now but that should change. Pensions can still pay out whatever it is they can actually afford to pay out, problem is it won't be 100%, it might be 80% or 40%, or I don't know it depends on the pension, and that's why ... just increase social security is what can be done.
dado potato
9-27-17, 1:13am
Wisconsin state and local government employees and public school teachers are in a pension plan called WRS (Wisconsin Retirement System). As of 2013, (and still, I believe) the pensions are 99.96% funded, according to annual reports by an independent firm. South Dakota is another state with a virtually 100% funded public pension plan.
The employer-employee split in the contributions to WRS was changed dramatically by Act 10, Republican Governor Scott Walker's 2011 collective bargaining reform law. Prior to Act 10, state and local governments contributed in accordance with collective bargaining agreements 99% of the employer-employee contributions to the WRS. As of 2013 employers paid 57% and employees 43%. The change was bitterly resented by employees and their unions, particularly when the pension contribution split had been the product of a series of collective bargaining rounds in which both sides had made concessions to arrive at agreement. The unions involved were not wrong in hoping for some sympathy from "the public in general" over the harm done by Act 10. But I would agree with LDAHL that when the votes were counted in the recall election of Governor Walker, there were more votes for Walker than his challenger.
Regardless of the changing split in employer-employee contributions, even Governor Walker has pointed with pride to WRS, as "the only 100% funded public pension in America". sic.
The "promised" benefit to a WRS recipient is in no way dependent on taxpayers (with or without pension coverage) bailing them out. Pension benefits increase in proportion to the 5-year smoothed returns on the investments of the funds under administration. After 2008 there were several years of no increases in benefits for this reason. WRS is different in this respect from certain other public pension schemes that are running into problems of underfunding.
I agree that an underfunded pension like you might find in Chicago or Dallas or Kentucky is a problem that will require painful choices.
ToomuchStuff
9-27-17, 1:16am
My plan is fully funded as it is a unique individually regulated pension plan but it resides under the umbrella of a much larger state pension plan which is decidedly grossly underfunded. It is not grossly underfunded because of unrealistic promises. It is grossly underfunded because the governor back before the crash of 2008 was so impressed with the high yields of the market that he diverted the agreed upon payments to the fund in order to spend money on other government programs. He basically stole it from retirees. Then of course when the investments didn't meet expectations the shortfalls could never be made up.
Now, nobody cares so much about the history of it all as much as how in tar nation are we going to pay for it?
I for one, very much care. LEO's relatives pension is controlled, (pretty sure don't remember specifics) by the dept. That is one reason the mayor would love to take them under city control, rather then state control. He could then dip into the funded pension funds, and screw with them the way other places have.
There are lots of examples of issues. Detroit, Puerto Rico, etc.
There have been a number of articles about our state pension fund being underfunded. They are still projecting a return on their funds of 7.25% after reducing from 7.5%. That's just silly if you ask me and an invitation for under funding. They got into trouble when the markets slowed in 2009 and even last year did not meet the goal. Even in times of higher interest rates, that still implies investments in higher risk bonds and stocks.
My last private employer, "almost" a fortune 500 company, allowed me a small pension, but they've discontinued any pension for new hires and have replaced it with slightly better matching of 401K contributions. My pension plus SS when I reach full retirement age will account for lees than half of my last middle class working wage. There is a perception among my former co-workers that state and government retirees get gold plated Cadillac pensions and health insurance that people with no pensions at all pay for in taxes. And on top of things, some have mismanaged their funding. I understand there are counter arguments to that, but I often get an earful on the issue.
Wisconsin state and local government employees and public school teachers are in a pension plan called WRS (Wisconsin Retirement System). As of 2013, (and still, I believe) the pensions are 99.96% funded, according to annual reports by an independent firm. South Dakota is another state with a virtually 100% funded public pension plan.
The employer-employee split in the contributions to WRS was changed dramatically by Act 10, Republican Governor Scott Walker's 2011 collective bargaining reform law. Prior to Act 10, state and local governments contributed in accordance with collective bargaining agreements 99% of the employer-employee contributions to the WRS. As of 2013 employers paid 57% and employees 43%. The change was bitterly resented by employees and their unions, particularly when the pension contribution split had been the product of a series of collective bargaining rounds in which both sides had made concessions to arrive at agreement. The unions involved were not wrong in hoping for some sympathy from "the public in general" over the harm done by Act 10. But I would agree with LDAHL that when the votes were counted in the recall election of Governor Walker, there were more votes for Walker than his challenger.
Regardless of the changing split in employer-employee contributions, even Governor Walker has pointed with pride to WRS, as "the only 100% funded public pension in America". sic.
The "promised" benefit to a WRS recipient is in no way dependent on taxpayers (with or without pension coverage) bailing them out. Pension benefits increase in proportion to the 5-year smoothed returns on the investments of the funds under administration. After 2008 there were several years of no increases in benefits for this reason. WRS is different in this respect from certain other public pension schemes that are running into problems of underfunding.
I agree that an underfunded pension like you might find in Chicago or Dallas or Kentucky is a problem that will require painful choices.
The WRS does have the feature of "risk sharing" that many systems lack. The only guaranteed payment is the annuity amount at the start of retirement. After that, market experience determines whether there is an increase or not, and annuities can be reduced to the extent of prior year gains. After the 2008-2009 crash, longer term retirees saw up to five years of reductions. There is no guaranteed cost of living escalator. Unlike some other states, Wisconsin Retirement System participants also contribute to the Social Security System, with the policy goal of eventually replacing 60-85% of a participant's income between the two at the end of a full career.
I believe there are a few other national or provincial plans that tie increases to investment performance or compensation increases of the working population, but none in America that I know of. Some US states are moving to lower-risk defined contribution plans.
After Act 10, taxpayers in some sense benefited from the fact that public employers were in a position to reduce budgets to the extent that their pension expenses were reduced. I don't know if Walker won the recall election because voters approved of Act 10 or because many (even those with little love for Walker) felt the recall process was being abused for political purposes.
I think we are in for some emotional debates in the future on the subject of retirement. Neither governments nor most individuals seem to be adequately prepared, There may be little sympathy for bailing out public plans, perhaps even a strong element of "pension envy". At the national level, people who are more prepared to retire may resent being taxed for the benefit of the less prepared.
The WRS does have the feature of "risk sharing" that many systems lack. The only guaranteed payment is the annuity amount at the start of retirement. After that, market experience determines whether there is an increase or not, and annuities can be reduced to the extent of prior year gains. After the 2008-2009 crash, longer term retirees saw up to five years of reductions. There is no guaranteed cost of living escalator. Unlike some other states, Wisconsin Retirement System participants also contribute to the Social Security System, with the policy goal of eventually replacing 60-85% of a participant's income between the two at the end of a full career.
I believe there are a few other national or provincial plans that tie increases to investment performance or compensation increases of the working population, but none in America that I know of. Some US states are moving to lower-risk defined contribution plans.
After Act 10, taxpayers in some sense benefited from the fact that public employers were in a position to reduce budgets to the extent that their pension expenses were reduced. I don't know if Walker won the recall election because voters approved of Act 10 or because many (even those with little love for Walker) felt the recall process was being abused for political purposes.
I think we are in for some emotional debates in the future on the subject of retirement. Neither governments nor most individuals seem to be adequately prepared, There may be little sympathy for bailing out public plans, perhaps even a strong element of "pension envy". At the national level, people who are more prepared to retire may resent being taxed for the benefit of the less prepared.
As someone who lived and taught in Chicago, I have watched the Illinois pension debates with real horror. I think you are so right about emotional debates, and much injustice is coming down the road. I think Baby Boomers are already despised and perceived as somehow having a free ride. I talk to 30-35 year old who have no idea how social security works or was supposed to work and think it is somehow a free ride on their backs. I think those of us at retirement age are going to be handed a "ticket to Oregon"--there, I have just coined that phrase and am going to claim ownership here and now. Assisted suicide is what I think they have in store for us, as we are going to be perceived very soon as "useless eaters."
As someone who lived and taught in Chicago, I have watched the Illinois pension debates with real horror. I think you are so right about emotional debates, and much injustice is coming down the road. I think Baby Boomers are already despised and perceived as somehow having a free ride. I talk to 30-35 year old who have no idea how social security works or was supposed to work and think it is somehow a free ride on their backs. I think those of us at retirement age are going to be handed a "ticket to Oregon"--there, I have just coined that phrase and am going to claim ownership here and now. Assisted suicide is what I think they have in store for us, as we are going to be perceived very soon as "useless eaters."
Illinois may be the most extreme case right now. I have read that some of their major plans are less than 40% funded. They recently narrowly avoided being assigned junk status. The potential for conflict between public and private workers, older and younger generations, and even different regions of the state seem high.
What can one do to prepare for the challenge? It isn't decades away from happening.
Illinois may be the most extreme case right now. I have read that some of their major plans are less than 40% funded. They recently narrowly avoided being assigned junk status. The potential for conflict between public and private workers, older and younger generations, and even different regions of the state seem high.
dado potato
9-27-17, 1:15pm
For those who are relatively early in their "earning years", it may be possible to prepare by a retirement planning strategy that visualizes retirement income as a three-legged stool: Social Security benefits, Qualified pension distributions (defined benefit or defined contributions), Investment Income. Set goals of frugality and saving.
For those nearing retirement "the die is cast". It may be that (as Central States Teamsters have experienced) retirement benefits will not be paid as promised. After exhausting any legal or political remedies, if the lost benefits can not be replaced, flexibility about living arrangements and detachment may address the problem. I would see if it is feasible to double up with a boon companion or two... maybe fellow sufferers... before opting for the ticket to Oregon.
What can one do to prepare for the challenge? It isn't decades away from happening.
I would say try to evaluate the policy risk of any government-sponsored program you participate in, perhaps discounting promises for planning purposes. I don't know if we're in "the new normal" permanently, but it might be prudent to err on the conservative side in estimating future investment returns. If you can, arrange for multiple uncorrelated streams of income in retirement. Do what you can to arrange the lowest tax liability possible. I would expect new or increased taxes as politicians finally react to "the most predictable crisis in history". Avoid unnecessary debt. Make a fetish out of living below your means. Have a plan. So many people seem to plan more carefully for vacations than their last 20-30 years of life.
Teacher Terry
9-27-17, 2:58pm
One good thing about ours is that the state can not rob it. One Governor tried unsuccessfully. It is protected in the state constitution.
One good thing about ours is that the state can not rob it. One Governor tried unsuccessfully. It is protected in the state constitution.
Several states have something like that. It's a tribute to the power of public employees unions of vears past, and currently one of the many roadblocks to Illinois getting its finances in order. I'm not sure it would offer complete protection in the event the state wound up in whatever version of receivership applies to state governments or if the constitution were to be amended.
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