6 Apr, 2014
New Report Highlights Looming Public Pensions Crisis in U.S.
GENEVA-April 02, 2014-(BUSINESS WIRE)–International insurance economics think tank The Geneva Association today issued an analysis of the growing crisis facing state and municipal pension systems in the U.S. The report suggests that the non-payment of annual required contributions and excessive reliance on one pillar of funding in pension planning are among the most significant challenges to overcome.
While there have been several municipal bankruptcies over time, on 3 December 2013, Detroit became the largest city in the U.S. to become legally eligible for Chapter 9 bankruptcy. Its ballooning deficits and large pension shortfall are characteristic of municipal bankruptcy cases. Across the country, states have posted funding shortfalls of more than a trillion dollars.
John H. Fitzpatrick, Secretary General of The Geneva Association said, “The successful pension reform in the State of Rhode Island has provided long-term sustainability to the system and shows that solutions exist. Increasingly, public pension plans are becoming a higher priority for many states and local governments, and they should be. With proper long-term planning and a serious focus on professional risk management, these problems can be tackled.”
The author of the study, Krzysztof Ostaszewski, Actuarial Program Director at Illinois State University, said, “A solution that provides real and substantial change will not come from financial operations. It must come from real reform that at least lowers or eliminates bankruptcy costs and establishes better governance. The ultimate fate of public pension plans in the U.S. depends on the willingness of plan sponsors to pay for them.”
Indeed, a 2010 report by the Pew Center on the States highlights the trillion-dollar shortfall facing state and local retirement systems in the U.S. due to policy choices and lack of fiscal discipline, namely the failure to make annual payments for pensions systems at actuarially recommended levels and expanding benefits without considering their long-term costs.
Financing retirement is becoming an ever-greater challenge due to higher life expectancy and low fertility rates. In response to these changing demographics, The Geneva Association has long advocated a “four-pillar” approach to pension planning: a public pay-as-you-go system (social security), employer-provided pension schemes, private savings and continued employment after retirement.
This report proposes that another key reason for the severe state of crisis of the public pension systems of state and local governments in the U.S. is that those systems are a dramatic departure from the four pillars concept. They greatly resemble pay-as-you-go systems with little fiscal restraint and without the proper mechanisms for restoring funding. A four-pillar structure offers a balance between socially desirable, yet socially costly, income protection benefits (first and second pillars) and realistically priced benefits that are potentially unaffordable to poorer workers (third and fourth pillars).
The Geneva Association analysis of the crisis calls for more in-depth study of solutions to the pension crisis and highlights in particular:
- the threat of bankruptcy facing municipalities in the U.S., where the pension funding in a majority of states (34) is below 80 per cent;
- how policy choices and lack of fiscal discipline have contributed to the shortfall in retirement funding;
- the imbalance in the U.S. pension system and the need for a holistic approach that relies on four different pillars: a public pay-as-you-go system (social security), employer-provided pension schemes, private savings and continued employment after retirement; and
- the human capital potential of retirees as a hedge against longevity risk.
For a copy of the report, please click here.
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