Which States Should Be Worried About Their Pensions?

by Lear Capital EditorialMarch 04, 2019

The numbers seemed to work in the optimistic baby boomer years. They figured if today’s workers pay into a fund for tomorrow’s retirees, a secure retirement and a fantastic employee benefit can be provided to all! As long as there are workers paying into the fund and it is generating a modest return, all our workers will be golden in their golden years!

But what if all those initial assumptions and calculations are off by quite a bit? What if today’s workers are paying less in to the pot? What if it is a LOT less? What if they retire earlier and live longer? What about inflation? What if the return is nowhere near the “modest” 7% needed for solvency? What if the return is actually negative? What if there is a market crash that wipes out 35-40% of the fund? What if that happens every decade or so?

The promises still remain. In some states they are constitutionally protected, prohibiting meaningful reform. Where will they find the money?  Hmmm… YOUR pocket looks pretty tempting!

Pensions in deep trouble...

The Illinois State Employees pension fund has been making the news a lot lately as it struggles with a massive funding crisis. It is nerve-wracking for the pensioners who counted on the promises of the state, their employer, for the bulk of their working lives and may have made no contingency plans. Why would they need to? The state promised them right there in black and white a healthy pension in retirement and their word is as good as gold, right?

But promises based on 1960’s projections are difficult to deliver on 2019 economic data.

Illinois assumed a 7% annual return on their pension fund, which turned out to be overly optimistic without taking a little more risk. They took risks, and then lost big in the housing crash. The pension fund is in the hole by about $130 billion. Shockingly, it only has funding for about 36% of its obligations.

Not only that, but state spending and costs out of that pension fund have gone up over 600% since 2000, nearly bankrupting the state of Illinois! Bonds in that state are now rated just above junk. Nonetheless, one of the solutions is to just issue more bonds to cover immediate needs, i.e. kicking the can down the road.

But fixing the problem in the most logical ways are unconstitutional and reform efforts have been struck down. They cannot constitutionally reduce benefits. They have already increased the state income tax by a hefty amount but they had to override a veto to do it. They are in a serious bind with almost nowhere left to look except raiding private retirement funds. Of course!

The Civic Committee of the Commercial Club of Chicago and the Civic Federation, a high-profile Chicago based non-profit recently came out with proposals to tax private retirement funds and pension income to pay down the bills and throw an extra $2.5 billion into the bottomless pit that is the Illinois State Employees’ Pension Fund.

So that’s the answer they are looking at in Illinois. But how is YOUR state doing? Illinois, at 36%, is in the bottom 3 states for pension funding. The bad news is NONE of the other states are 100% funded. Wisconsin comes close with 99% funding, but the AVERAGE state is only 66% funded!

Here is a state by state breakdown from Pew Charitable Trusts:

  1. Wisconsin — 99%
  2. South Dakota — 97%
  3. Tennessee — 94%
  4. New York — 91%
  5. Nebraska — 89%
  6. North Carolina — 88%
  7. Idaho — 88%
  8. Utah — 86%
  9. Washington — 84%
  10. Iowa — 82%
  11. Delaware — 81%
  12. Oregon — 81%
  13. Florida — 79%
  14. Maine — 77%
  15. Arkansas — 77%
  16. Missouri — 77%
  17. Georgia — 76%
  18. Wyoming — 73%
  19. Texas — 73%
  20. Virginia — 72%
  21. Nevada — 72%
  22. Ohio — 72%
  23. West Virginia — 72%
  24. Oklahoma — 72%
  25. Montana — 71%
  26. California — 69%
  27. Alabama — 67%
  28. North Dakota — 66%
  29. New Mexico — 65%
  30. Kansas — 65%
  31. Maryland — 65%
  32. Vermont — 64%
  33. Michigan — 64%
  34. Indiana — 63%
  35. Alaska — 63%
  36. Arizona — 60%
  37. Louisiana — 60%
  38. New Hampshire — 58%
  39. Massachusetts — 58%
  40. Mississippi — 58%
  41. South Carolina — 54%
  42. Rhode Island — 54%
  43. Minnesota — 53%
  44. Pennsylvania — 53%
  45. Hawaii 51%
  46. Colorado — 46%
  47. Connecticut — 41%
  48. Illinois — 36%
  49. Kentucky — 31%
  50. New Jersey — 31%

Nearly all states have a crisis brewing, and when push comes to shove, your portfolio and your retirement plans might start to look like low hanging fruit!

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