State pensions shortfalls are a growing chasm to be crossed in the years ahead. The Pew Charitable Trusts recent report highlights some seriously deficient states in need of either major funding increases, or major benefits decreases. Pensions shortfalls area measure of many different assumptions, but states, just like individuals, are crimped in a low rate environment. it just takes more dollars today to ensure lifetime income for an unknown numbero f tomorrows… in a higher rate landscape, that swings the other way and return expectations help cushion the shortfall.
Beware, however, of state treasurers and auditors making irrational assumptions about the returns they expect. it’s not uncommon for plan administrators to assume 6-9% annual returns, then turn in results of 0 to 4% just like everyone else. if your plan or state is assuming a rosy tomorrow and suffering today, their shortfall is likely to be much larger than they are letting on.
The Pew Center on the States found 34 states failed to maintain safe levels of money in the pension funds, which most experts agree is about 80 percent of long-term obligations. Four states – Connecticut, Illinois, Kentucky and Rhode Island – didn’t even have 55 percent of the money they’ll need in the long run.
If you have a state pension, this story is well worth watching. It seems benefits reductions are inevitable.
Some more of the Pew findings, found online here, are as follows
Pension plans represent more than half of the retiree benefit funding shortfall. Experts say that a healthy pension system should be at least 80 percent funded.
- In 2010, only Wisconsin had fully funded its pension plan and 34 states were below the 80 percent threshold.
- Connecticut, Illinois, Kentucky, and Rhode Island were the worst among the states, with pensions funded under 55 percent in 2010.
- North Carolina, South Dakota, Washington, and Wisconsin were the best among the states, with pensions funded at 95 percent or better in 2010.
- Keeping up with the annual required contribution is perhaps the most effective way that states can responsibly manage their long-term liabilities for public sector retirement benefits. Pew’s research shows that states that consistently make their full payments have better funded retirement systems and smaller gaps.
Retiree Health Care
States only have 5 percent of the funds needed to pay for their retirees’ health care and other non-pension benefits—such as life insurance.
- 17 states did not set aside any money to fund their retiree health care liabilities.
- Only seven states had funded at least 25 percent of health care liabilities— Alaska, Arizona, North Dakota, Ohio, Oregon, Virginia, and Wisconsin.
- Alaska and Arizona are the best among states, with nearly 50 percent of their health care liabilities funded.