Largest U.S. Public Pensions Face $2 Trillion Gap, Moody’s Says

[Purveyor]

Source: Bloomberg

By Brian Chappatta Sep 25, 2014 12:32 PM ET

The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, showing that investment returns can’t keep up with ballooning obligations, according to Moody’s Investors Service.

The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released today. Yet the New York-based credit rater’s calculation of liabilities tripled in the eight years through 2012, according to the report.

“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”

U.S. states and cities are contending with underfunded worker retirement systems. The 18-month recession that ended in June 2009 wiped out asset values and forced cuts to contributions. Now, liabilities are crowding out spending for services, roads and schools.

Read more: http://www.bloomberg.com/news/2014-09-25/largest-u-s-public-pensions-face-2-trillion-gap-moody-s-says.html

[valerief]

1. Privitization. There'll be no public anymore, just kings and their slaves. nt

[seveneyes]

2. Even a pyramid won't last

What goes up, must come down
What's been lost, must be found

[FBaggins]

3. This is largely due to how those liabilities are calculated

The formula essentially assumes that interest rates on government securities will stay at these historically low levels indefinitely - which is pretty unlikely.

As rates climb (perhaps rapidly), these calculations will shift fairly dramatically in the other direction.

[taught_me_patience]

6. I don't think interest rates are going anywhere for a very long time

neither do most bond holders... the 10 year is trading a 2.5%. If anything, there are still deflationary pressures.

[FBaggins]

10. That would put you in a fairly small minority

neither do most bond holders

You assume that the current price reflects market expectations... but may be missing the fact that "most bond holders" aren't driving the current price. The federal reserve's buying program is doing that - with the express intention of keeping rates down. Actual bond market expectations vary almost exclusively around how fast rates will rise... not whether.

the 10 year is trading a 2.5%

Which is up about 1% from roughly a year ago...and that's while the fed is still easing.

Note that pension funding calculations are backward-looking... and even that increase is not reflected in current funding estimates.

[dixiegrrrrl]

21. The Fed buying is supposed to stop in 2015.

Be interesting to see if they do
and what happens when they do.

[FBaggins]

22. They've already started

Their purchases are down from $85 Billion/month to $15 Billion... and expects to end the easing next month.

[Yo_Mama]

35. The 30 year's hovering around three. That doesn't suggest much of a long term rate increase.

None of the good traders I know expect anything either than acute instability later, or low rates long term. If there's acute instability later, they'd rather be in Treasuries now due to the liquidity. If there's long term low rates, the riskier investments don't really make sense at current rates. You have to go out there really hunting for junk to get much in the way of risk premiums (except of course for subprime car loans, but that is another story).

In my view a great deal of bond trading currently is really currency speculation. You buy into one or another not for the interest premium, but for the hoped-for currency differential premium.

[FBaggins]

37. If the 30yr was driven only by rate expectations, that would be true.

But it isn't. The Fed just got finised dumping huge amounts of funds into holding down long-term rates artificially... and now massive amounts of capital are flowing into them from Europe and Japan. Those new inflows are not based on rate expectations vs. current pricing, they're based on expectations for dollar strength.

my view a great deal of bond trading currently is really currency speculation.

Ah... then we're on the same page. I agree... but that's different from saying that it reflects the market's actual long-term rate expectations.

You have to go out there really hunting for junk to get much in the way of risk premiums (except of course for subprime car loans, but that is another story).

For bond traders, yes... but pension funds should be more broadly diversified than that. I would agree that a pension fund that actually invested in 10-yr treasury equivalents would be under-funded if the current calculation says that they are. But who does that?

[Yo_Mama]

38. But the fact that they are down to currency spec is telling

It means everyone's short term, really. And that says something about the future rates and the future economy.

Plus, the fact is that way too much risk is underpriced in loan participations and bonds of all stripes, and that strongly suggests that the Fed won't ever be able to raise rates much for quite a long while. Because they can't. Functionally, they can't.

Those returns on those pension funds are dependent on those risks not materializing. It's that simple.

Functionally - if the Fed were to raise rates mortgage rates would rise. As of this morning, purchase money apps were running over 10% below last year. There is no space there to raise rates without pushing the economy down, which then of course would cause the Fed to raise rates.

So rates can't go up much. We have a long way to go before they can, and most bond traders do believe that. Therefore they have shifted to currency spec.

[William Seger]

31. The way I read it, it's largely due to...

... "unfunded pension liabilities... due to inadequate pension contributions." I read that as meaning employees are getting stiffed on pension promises.

[FBaggins]

32. It all depends on how you define "underfunded" and "inadequate"

The amount that needs to be in the fund (and therefore the amount that the employer needs to contribute to keep it at that level) is a function of the fund's investment returns.

If governmental (or quasi-governmental) actions keep rates artificially low on the treasury securities that are used to estimate those future investment returns, then the amount necessary to be considered "adequate" or "funded" will be artificially high - even if actual pension fund investment returns can reasonably be expected to far exceed those treasury rates (as they have).

[lovuian]

4. The administrators of the Pensions

books need to be checked because many show creative bookkeeping
where retirees money were used for the wrong things

[Downwinder]

5. Lets talk about Congressional pensions.

What's the gap there? After all, leadership sets the example.

[Historic NY]

7. The article is pretty vague...

NY State State & Local Retirement System is the best in the nation....80 cents of every dollar paid out in the last 20yrs has come from its investments. 17 cents from employers & 3 cents from employee contributions.


The sound investment framework provided by the Fund’s asset allocation and diversification strategy enabled it to generate a 13.02 percent rate of return on its investments during the 2013-14 fiscal year. As of March 31, 2014, the Fund was valued at $176.2 billion. Since 2009, the Fund has seen five consecutive years of investment earnings growth. Prior to the recession, in fiscal year 2006-07, the value of the Fund was $154.6 billion.

I don't know where they got the facts for the story...I got them from the system I'm a member.

Sure it took a hit but its recaptured it and its grown. The independently elected Comptroller has advised members several times, that contrary to whats is said in the media, it oesn't fit the actual numbers.

[FBaggins]

12. See my #3

The problem reflected in the story isn't that pension funds aren't earning enough on their investments... and we know it isn't that people are making lots more money (increasing the expected future payout)...

... the real problem is that any calculation related to how much you need to have in an account today to fund a stream of income many years down the road contains one critical assumption - what rate of return will those investments yield over that time?

Employers used to have some flexibility in this calculation, but that led to abuses, so now they're required to use a figure that's based on relatively recent treasury rates. The problem with that is that it means that when rates are very low, the calculation returns a much higher number than what you really need in that account (assuming that rates of return on overall portfolios over decades are actually higher).

The fund you reference should easily outperform the rates that they're forced to use for the calculation... so they very well might be "underfunded" by the required calculation, but in reality still have enough to meet actual retiree payouts.

[ctsnowman]

8. S&P, Moody’s Lose Bid to Block Calpers $800 Million Suit

http://www.bloomberg.com/news/2014-05-24/s-p-moody-s-lose-bid-to-block-calpers-800-million-suit.html

[OnlinePoker]

9. Two years ago, it was $1.2 trillion for the top 100 public pensions

At that time, Moody's, using a different way to measure said the top 100 had a liablility of $2.2 trillion. Even with a supposed recovery, there has been no effort to address the issue. What I don't like is we don't get to see the list unless we sign up to Moody's .

http://www.reuters.com/article/2012/10/15/us-usa-pensions-study-idUSBRE89E0NF20121015

[closeupready]

11. Sure, after Wall Street got done handling those pension funds,

the surprise would be that anything was LEFT for retirees.

[SheilaT]

13. While this hasn't been much on the radar,

it's a problem that has been building for at least thirty years. I know that it's easily that long ago that I occasionally read something about the growing public pension liability in the future. Among the reasons people take and stay in public jobs is the promise of a good pension down the road, and I believe that at least some of them exempt those employees from participating in social security.

First they underfund the pension plans, then there's the forced bankruptcies of various municipalities, and the first thing that happens is to slash the pensions long promised to the public employees. It's a lot like what's already happened in the private sector. Meanwhile, the wealthy and the corporations never pay their share of the tax burden, and the 99% are told that's it THEIR fault the economy is so bad.

[closeupready]

15. Also, pension funds are known as 'dumb money' -

i.e., the sucker playing poker with a table full of card sharks.

They were big-time customers for subprime mortgage CDO's -- 'investment products' that were rated by the rating agencies as AAA. The scandal in that, for me, is twofold: 1) the rating agencies were getting paid by the investment banks which were putting the CDO's together; and 2) pension fund administrators are most always prohibited (in the fund's by-laws) from investing funds in anything LESS than AAA-rated 'investment products'. See this story as in illustration: http://www.theguardian.com/business/2011/aug/22/ratings-agencies-conflict-of-interest

So, simply find a rating agency that will label your junk as gold, and bingo bango bongo, the only person who loses money here is ... the retiree.

[turbinetree]

14. Bankruptcy

Working in a industry where I have two airline pensions it is amazing that after these firms filed for bankruptcy our pension funds reverted to the PBGC (Pension Benefit Guarantee Corporation). When these two airlines filed the 10k with the SEC they said that all pension funds are fully funded, no they were not, if they were they would not have had to cut mechanics/pilot, flight attendants , ground service pensions in half or robbed the fund to keep the operations going, even after what Lorenzo did to Continental, Eastern ect.. USAIR, American, United, Northwest, we gave back and then they were still underfunding the pension taking our pension funds to be used as an operating charge against the fund.
They have a law to protect the pensions hence the PBGC, which is picked up by the tax payers after these airlines go bankrupt, Wall Street down grades the firms or Moody's which down grades the credit, and if you are a ESOP watch out neither the firm on Wall Street or the credit agencies like ESOP and your stock tanks, think of the book called Flash Boys, they have you coming and going.
Then you have these corporations whining they can't fund the pensions, so they ship jobs over seas, they don't pay taxes and the cycle starts all over, promises are made and when they, the new human called "corporation" by the United States supreme court don't pay the bill then we the worker should be able to get our promise instead of holding the proverbial bag of empty promises.

[SheilaT]

19. And most of those airline pensions

were cut when they went over to the PBGC. I know. I have one of those

I recently stumbled across some old paperwork from before the pension went to PBGC, and discovered I'm now getting half of what I had been on schedule to get back then. Luckily for me, my airline time was some decades ago, and I always knew that my eventual pension would be a very small part of my retirement, but it was still astonishing to discover.

[SansACause]

16. It's really worse than it sounds.

Any gains in the markets are because of Quantitative Easing Infinity. If the government ever stops its $35 billion/month infusion of cash to Wall Street, I expect all gains to disappear.

[whatthehey]

24. If they ever? Already stopped. Markets went up.

I never understood the doomers here. On the one hand they see the big Wall Street players as supremely powerful Macchiavellis who rig the game with scornful ease, but on the other they act as if these master manipulators didn't know about, didn't plan for and didn't incorporate the widely known and publicly broadcasted exit plans for QE into their calculations.

[SansACause]

25. It's been two weeks!

The jury is still out whether the markets will fall as badly as they did when QE1 and QE2 ended, but I expect they will eventually. I imagine QE4 is getting ready for the holiday season.

[whatthehey]

27. So in other words, any time the next market downturn happens, you'll claim QE caused it?

Why didn't those Wall Street geniuses know it was coming and price it in when plumbers in Poughkeepsie were fully informed?

Or, as seems far more likely and in keeping with data, they really did....

[jtuck004]

17. Millions more into deep poverty. SS was designed to supplement this now stolen money.

...
Today, however, workers who have any retirement plan at all generally have defined-contribution plans — basically, 401(k)’s — in which employers put money into a tax-sheltered account that’s supposed to end up big enough to retire on. The trouble is that at this point it’s clear that the shift to 401(k)’s was a gigantic failure. Employers took advantage of the switch to surreptitiously cut benefits; investment returns have been far lower than workers were told to expect; and, to be fair, many people haven’t managed their money wisely.

As a result, we’re looking at a looming retirement crisis, with tens of millions of Americans facing a sharp decline in living standards at the end of their working lives. For many, the only thing protecting them from abject penury will be Social Security. Aren’t you glad we didn’t privatize the program?
...

Krugman, in NYT, here.

That's over and above the "official" 50 million or so now, and on top of anything that will happen in housing when interest rates increase.

Most will just suffer and die in silence, though, if our recent history has much to say. I suspect there will be uprisings, put down by the authorities now that they have taught everyone how to rebel, and put mechanisms in place to control them. And people just walk into them without any other strategy. And while someone in the future (always thought it was weaker to lean on hope than working a plan) might change it, it took a Civil War to interrupt the plantations the first time. But today people are much too civilized and educated, so this time might be different. In a more tragic way.

People are awfully obliging.

[Turbineguy]

18. They mean

Wall Street owes pensioners $2 trillion.

[kelliekat44]

20. Well guess why there is underfunding...find the crooks and arrest them. nt

[hack89]

33. That would be nearly every elected state and local official for the past 3 decades. Nt

[apnu]

23. "investment returns can’t keep up with ballooning obligations"

This is it right here. The failure of Republican economics.

[Omaha Steve]

26. In Omaha there are several things that haven't been brought up here

They fired a consultant after a couple sub-par years. Bought Iomega at $36. Sold at $10 comes to mind.

While the City of Omaha population has grown through annexation, the number of employees has dropped. Do more with less. Fewer people contributing to support the higher number of retirees.

People retire and come back part time. Part timers DO NOT CONTRIBUTE to the pension fund. IF that were a full time worker, money would be coming in. The city and pension consultants have told the city this. The city does nothing about it. All their fault on this.

Buy outs of management and staff reductions were way underestimated for the strain that was added to the fund.

By law our fund is 50% in stocks. 50% bonds.

Disability pensions are above the national average. A 30 year old that becomes disabled after working a minimum of just five years will get a 60% income until regular retirement age 66.5. Then they will get the small pension they actually earned.

My union was the first to take proactive steps in the local contract with the city itself is one of the bright spots.

We will be voting next Tuesday the 18th on a new proposal. IF approved, new hires after Jan first of 2015 will be in a lower paying type of pension. More risk for the workers. No more disability pensions.

They average worker gets all their contributions and interest back in just four years.

Civilian and management are in the same plan.Our plan had a nice net gain last year. Police and fire have their own plans.

I might add to this tomorrow. It's late. I just got home from my granddaughters volleyball game. They won 2 of 3.

OS

[madville]

28. Rising life expectancy plays a factor as well

Pensions, Social Security, and Medicare built up big reserves when life expectancy was around 70, now at almost 80, that factor is placing additional strain on the programs as well and will play a larger role as it continues to rise.

[Live and Learn]

29. Don't worry, we are fixing that problem.

Life expectancy in America rivals Third World

http://www.salon.com/2013/10/22/life_expectancy_in_america_rivals_third_world_partner/

The Affordable Care Act is merely a small step in the direction of universal healthcare. One need only look at the data on life expectancy among Americans to realize how badly health care reform is needed in the United States. People in much of Europe are, on the whole, outliving residents of the U.S., which in some places, is looking more and more like a Third World country when it comes to life expectancy.

There is a considerable amount of data on life expectancy among Americans, much of it disturbing. According to the World Health Organization, the U.S. lags behind a long list of countries when it comes to overall life expectancy. WHO has reported that the U.S., factoring in both genders, has an overall life expectancy of 79 (76 for males, 81 for females) compared to 83 in Japan and Switzerland, 82 in France, Iceland, Spain, Italy, Australia, Canada, Israel, Luxembourg, Singapore and Sweden, 81 in Germany, the Netherlands, Austria, New Zealand, Finland, South Korea, the Republic of Ireland and Norway, and 80 in Belgium, Slovenia, the U.K., Malta, Kuwait and Portugal.

Those WHO figures for the U.S. take into account the country as a whole, and overall, Americans clearly aren’t living as long as Europeans. But the news becomes even more troubling when one examines a report that the Institute of Health Metrics and Evaluation at the University of Washington released in July 2013. That study broke down life expectancy for men and women in different parts of the U.S., showing a strong correlation between income levels and longevity. The report found that life expectancy is 81.6 for males and 84.5 for females in Fairfax County, Virginia (a very affluent area) and 81.4 for males and 85.0 for females in Marin County, California (another upscale area) compared to only 63.9 for males and 72.9 for females in McDowell County, West Virginia or 66.7 for males and 73.3 for females in Tunica County, Mississippi.

The fact that males in McDowell County are, on average, dying 18 years younger than males in Fairfax County or Marin County speaks volumes about inequality in the U.S. That type of disparity is more typical of a developing country than a developed country. Yet when one compares life expectancy in McDowell County to life expectancy in Guatemala, one of Latin America’s poorest countries, Guatemalans come out slightly ahead. WHO has reported an overall life expectancy of 69 for Guatemala (66 for men, 73 for women).

[quadrature]

30. where Detroit leads, others will follow

there is an easy solution to this

[bemildred]

34. Moody's is corrupt.

I love the way they just pull numbers from their ass and act like they are "facts", and get paid for it.

[Octafish]

36. Just do like they did in Detroit.

Work hard all you life? Too bad. So sad.