America’s public-pension funding crisis worsens

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Figures from Boston’s Centre for Retirement Research show that the average funding ratio for public pension plans has fallen to the lowest level this century

may have rallied from the depths they plumbed when the coronavirus pandemic was spreading rapidly around the world. But the500, America’s main stockmarket index, is still below its level at the start of the year. That is bad news for pension funds, which rely on their investments to pay out benefits to retired people.

Unless markets recover fully, the Centre for Retirement Research in Boston estimates, the average funding ratio of American state and local-government pension plans for the fiscal year ending in June 2020 will be 69.5%. That is the lowest level this century. Back in 2000 the average plan was fully funded.

Even that measure relies on the generous way that public-sector plans can calculate their pension liabilities. The cost of paying pensions stretches decades into the future; those expected payments must be discounted in order to calculate the current funding cost. The higher the discount rate, the lower the current cost appears to be.

In the long run, however, accounting conventions cannot lower the actual cost of providing pensions. Many companies in the private sector have abandoned offering pensions linked to workers’ final salaries because of the increased expense. Thefigures show that the cost has been steadily rising for public-sector funds as well. Back in 2002 they paid an average of 7.8% of payrolls to fund pensions; in 2020 that contribution is likely to be 19.7%, the highest so far this century.

 

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