As we've documented time and time again, even the epic bull run in stocks and bonds that has transpired since the financial crisis hasn't been enough to make up the liabilities shortfall at America's pension funds. In fact, if anything, the problem has only gotten worse, as the amount owed to retirees is accelerating faster than assets on hand to pay those future obligations.
Liabilities of major US pensions are up 64% since 2007, while assets are up only 30%. And that problem has only gotten worse over the past fiscal year, as pensions funds largely missed their targets by the widest margin since...2016, WSJ reports.
Public pension plans with more than $1 billion in assets reported a median return of 6.79% for the year ended June 30, according to Wilshire Trust Universe Comparison Service data. That's short of the 7.25% long-term return that most funds need to get back to a place where they can cover their liabilities.
Missing these projections is a huge problem for pension funds, because its the projections - not the actual returns - that determine how much money state and local governments chip in.
And although the 10-year bull market has been good for pensions - large public plans had five years of double-digit returns and a 10-year annualized return of 9.7% through June 30 - most funds aren't anywhere near covering the long-term costs of benefits, especially as more employees are living longer, and birth rates decline, meaning there will eventually be fewer tax dollars to support state contributions. Many state governments have started to cut back on benefits, but these cuts won't have an impact for decades. Plus, in the aftermath of the financial crisis, many state governments skimped on pension contributions for politically expedient reasons, as state resources were badly needed elsewhere.
According to data from the Federal Reserve, state and local pension plans have about $4.4 trillion in assets, which is $4.2 trillion less than they need to pay for promised future benefits (the data in the chart below covers a slightly different universe of funds, but the theme is consistent, and clear).
To help make up the shortfall, many pension funds have increased their allocations to 'alternative' investments like private equity. Which is ironic, considering that many of the best performing investments in recent years were regular ol' stocks and bonds (and once fees are factored in, their outperformance is even greater).
“For a public defined-benefit plan, we just feel like if you can focus on high-quality stocks and bonds and take a long-term approach, you’ll be better off, especially after fees,” Jay Bowen, president and CEO of Bowen, Hanes & Co., told WSJ.
According to Wilshire's calculations, a portfolio of 60% domestic stocks and 40% domestic bonds would have returned 9.13% for the year ended June 30.
And any funds that sold during the brutal Q4 selloff or the trade-inspired turbulence this Spring probably missed out on rebounds that ultimately would have helped their bottom line.
Some of the states with the most troubled pension systems - like New Jersey, for example - have taken steps recently to right the ship. Others are considering radical ideas like transferring public assets to their pensions funds (as is the case in Illinois).
But unless state governments dramatically increase their funding levels, a nationwide pension crisis could arrive seemingly out of nowhere...since the public is largely ignorant of what's truly at stake.