Coronavirus Lockdowns to Cause Earlier Insolvency of Failing Public Employee Pensions
The pensions of public employees, the people who work for state or local governments, are in trouble.
After years of promises by politicians—who, like public employees themselves, have done little to provide funds to pay for the generous retirement benefits—many public employee pension funds are now at increased risk of insolvency as the economy faces turmoil from the coronavirus lockdowns.
This long-festering problem has become so bad that some pension analysts think that several large public employee pension funds will become insolvent by 2028, if not sooner.
The Financial Times reported recently on the findings of Jean-Pierre Aubry at Boston College’s Center for Retirement Research (CRR), who singled out two large public employee pension funds with hundreds of thousands of members as being particularly at risk of insolvency, unable to pay the pensions promised to their members because they haven’t been putting enough money into them for years:
More than 320,000 members of the New Jersey Teachers and Chicago Municipal public pension plans face the biggest risks as severe cash outflows are draining the assets of these two schemes.
A slow recovery for the US stock market could result in Chicago Municipal’s funded position falling from 21 per cent this year to just 3.6 per cent by 2025. This would eave assets to cover just three months of the fund’s retirement payments, according to CRR’s analysis.
New Jersey Teachers is also burning through cash, with its funded position projected to decline from 39.2 per cent to 23.2 per cent over the next five years. By that time, New Jersey Teachers would have assets to cover 19 months of retirement payments.
That fate will come despite the intervention of central banks, who flooded markets with funds specifically to avoid pension losses.
The Organization for Economic Co-operation and Development (OECD) recently published a report showing how pension funds in OECD countries recorded a massive loss of approximately $2.5 trillion during the stock market meltdown in February through late March. Shortly, after that, central banks intervened with monetary cannons to rescue stock markets and other financial assets to avoid pension returns from going negative.
Although the stock market has since gone on to a remarkable recovery, thus limiting the damage that pension investments in stocks may realize, the economic damage from the lockdowns will weaken state and local government’s ability to fund public employee pension funds through their constriction of ordinary commerce.
There are three potential ways to solve this problem. First, the politicians and public employees could face up to reality and acknowledge their failures to fund their retirement benefits by cutting their promised benefits to sustainable levels.
Second, politicians and public employees could demand that taxpayers in their states and districts bail them out by paying higher taxes so the public employees can keep their generous pension benefits.
Third, the politicians and public employees could demand the federal government bail them out, which would require the government taking on trillions of dollars more in debt, on top of the trillions it has already racked up this year alone, following the economic damage caused by the shutdowns of so much of the U.S. economy in response to the coronavirus pandemic. Shutdowns of businesses that were ordered by state and local government politicians, who so clumsily implemented them, they were far more damaging than they needed to be.
Which of these options do you think state and local politicians and public employees will pursue to benefit their interests?