The Pension Problem

Public pensions in the United States are approaching a cliff. Everyone involved can see it coming, but the solutions to avoiding it are either unpalatable or unrealistic. This will have a significant impact on millions of Americans in retirement and yet all we can seem to do is to keep marching toward the cliff as slowly as we can manage.

The problem is many of these pensions simply do not have the assets required to pay out the benefits they have promised. The deficits vary but have become so common that they have almost become a hard and fast rule of such programs. The problem is many of these programs have fallen short of the target rate of return they need to meet to be sustainable. These shortfalls have piled up over the years and now present a borderline impossible goal. In some cases the funds were mismanaged, fees were excessive, expectations were set too high, and sometimes the market just didn’t perform the way it needed to.

Let’s assume that the assets in a particular pension need to hit a target return of 7% to sustain itself. As with any investment, occasionally it outperforms the 7% goal and occasionally it underperforms. This means that the net between the good years and the bad years must remain at or above 7%. Every year the pension fund does not meet its goal, it gets substantially more difficult to reach that net goal. You can see how this problem could compound over the course of 20, 30, or 40 years. There are solutions, but the further the pension gets from its target the more difficult it gets.

This is not to scare those of you with a pension, nor to suggest that they are not a valuable resource for the many Americans who have them, but rather to encourage diversification. As with any investment plan, putting all of one’s eggs in one basket can be a risky proposition. You should consider saving elsewhere on your own in addition to utilizing the pension benefits made available to you by your employer. Even if you have your heart set on guaranteed lifetime income there are ways to supplement that independent of your pension.