Everyone knows that Social Security and Medicare are underfunded. They can only provide the benefits they have promised by borrowing from future taxpayers who are obligated to pay for them. And these programs will never be fully funded because the obligations are growing faster than the public’s ability to pay for them. The nation’s economic growth cannot keep up with the politicians’ promises. But what the public doesn’t realize is that beneath the gigantic funding gaps in these federal programs there are several levels of promised benefits that are similarly underfunded. These include state pension liabilities, city and county pensions, teachers’ pensions, and pensions of private corporations, including those supported by the Pension Benefit Guarantee Corporation—which itself is underfunded and has indicated it will likely have to go out of business in a few years.
The PBGC has two kinds of programs: single-employer (light blue on graph) and multi-employer (dark blue). Both have lost billions of dollars, with the multi-employer programs being by far the biggest losers. A report by the PBGC projects it will run out of funds in 2022, which is close to the Congressional Budget Office projection of 2021. The CBO projects that almost $9 billion of additional funds would be needed to continue paying guarantees to multi-employer plans through 2024.
A recent analysis by Wirepoints shows that between 2003 and 2016, accrued liabilities (what the states owe) grew more than 50% faster than assets in 28 states and more than twice as fast in 12 states. New Jersey grew 4.3 times faster than GDP, Illinois (3.32 times), Connecticut (3.18), New Hampshire (3.46) and Kentucky (3.08). The Wall Street Journal notes that the “solution” is always to raise taxes but “no tax hike is ever enough because benefits keep growing faster than revenues…The only salve to state pension woes, as the Wirepoints study notes, is to reign in current worker benefits.”
The PBGC supports 71 penniless union pension funds, but the payouts are often down to about one-third of what the worker is due. The average Local 707 retiree was getting $1,313 a month from the union pension fund, but the average monthly take home is now $570.
Writing in the San Diego Union-Tribune, Dick Vorkmann says, “Almost every public pension plan is underfunded, some severely so. Illinois and Connecticut have only 35 percent of their liabilities covered by assets. San Diego County, at 77 percent funded, has an unfunded liability of $3.3 billion. San Diego City‘s unfunded liability is $2.1 billion….[Under the current system] taxpayers don’t pay for the cost of the pension being earned by employees in that year, but rather just pay for the pension checks to the current retirees who worked many years ago. Then, years from now, taxpayers will pay for the pension costs of the public employees working today. This is what our Social Security and Medicare systems have become: unfunded pay as you go plans. And that is why there is concern that these systems will go broke in the not too distant future.”
Dallas has the fastest-growing economy of America’s 13 largest cities. Last year, the Dallas Police and Fire Pension Fund paid out $283 million and the city put in just $115 million.
The Manhattan Institute’s Josh B. McGee reports that teachers’ pension plans, which cover more people than all other state and local plans combined, have at least a $500 billion difference between promised benefits and money set aside to fund them.
Standard & Poor’s 500’s biggest pension plans face a $382 billion funding gap. Of the 200 biggest defined-benefit plans in the S&P 500, based on assets, 186 aren’t fully funded. They simply don’t have enough money to fund current and future retirees. U.S. private pensions overall have only 82% of the funds necessary to meet their liabilities. That’s a U.S. $3 trillion shortfall.
Ania Zalewska, professor of finance, University of Bath, concludes: “The pension industry is already in a deep financial crisis and could well be the trigger for another global financial and economic meltdown.