Both corporate and public pensions are collapsing, leaving millions of workers with a take-home pension that is only a fraction of what they were originally promised. Unfortunately, this state of affairs is only set to get worse as pension funds across the nation explode for lack of funds.
Following is an overview of why things got this bad, and what the pension crisis means for the nation’s future.
Where the Trouble Started
The trouble with pension funds began during the recession in the early 2000s, and was made worse by the economic downturn of 2008-2009. Both these crises wiped out trillions of dollars of investments made by pension managers. Most pension plans have regained or nearly regained all the money they lost during this time period; however, they are still plagued by a low insurance rate that keeps plan liabilities inflated.
Current population trends have also exacerbated the problem. A growing number of people are retiring or will be doing so in the next few years. What is more, retirees are living longer than they did in times past. A shortage of jobs in certain sectors means there are fewer workers funding ever-growing pension costs.
In other instances, companies and factories that have gone bankrupt have left pension funding in the dust. The combination of some or all of the above events has left both public and corporate pension plans trillions of dollars short in funding.
Problems for Pensioners
In 2014, President Barack Obama signed by Multiemployer Pension Fund Reform Act into law. This law enables pension funds to apply to the Treasury Department for permission to cut back pensioner payments. A number of pension funds across the nation have already applied for permission to reduce pensioner payments, and it is likely that other corporate pensions will follow suit.
At present, the United States Rust Belt is being hit particularly hard. Thousands of former iron workers in Ohio, for instance, have had pensions reduced by more than half; what is more, the cuts may increase as the pension plan cannot bring in enough money to meets its obligations. Other professions that are particularly vulnerable include factory workers, construction workers, truck drivers and office workers.
However, it isn’t just Rust Belt workers that are in danger. Illinois’ state pension program is completely insolvent, and not even a budget agreement by the state governor and congress can fix it. Connecticut, Arizona, Kentucky and New Jersey state pension plans are nearly as insolvent as Illinois’.
Corporate plans are hardly better; Intel and Delta Airlines have less than half of the assets they need in their pension plans to meet current obligations while American Airlines, Proctor and Gamble and a number of other companies have less than 60% of needed funding.
A Mess for Everyone Else
Failing pension plans don’t just affect current and future pensioners. In Illinois, massive tax increases have been passed in a desperate attempt to gain needed funding for state pension plans. Texas Public Policy Foundation Director James Quintero noted earlier this year that taxpayers in major Texas cities should be concerned about shortfalls in pension funding as Texas’ state constitution does not allow pension funds to slash payments.
An increase in taxes isn’t the only problem — or even the most serious one. In California, some cities have already begun to cut services in order to fund pension payments, and experts warn this trend may extend to other cities in the United States. Other financial writers note that state and even the Federal government may look for new ways to get their hands on privately owned wealth in an effort to placate angry pensioners.
One financial expert has gone so far as to suggest that the government sell off public assets such as airports, forests, ports and equity in public enterprises to fund state pension shortfalls.
Sadly, there doesn’t appear to be a happy ending to the pension problem. Corporate pension funds will likely slash payment to current and future retirees, leaving elderly individuals bereft of promised benefits. State pension funds will likely tap an already stressed out middle class in an effort to pay those who retire from government employment. In the end, everyone loses as the pension crises sets off another recession that will affect taxpayers of all ages and walks of life.
Regards,
Ethan Warrick
Editor
Wealth Authority
