Amid the turmoil in markets worldwide, U.S. public pensions are facing the worst decline since the Great Recession, reports an article in Bloomberg. Stock and bond losses are leaving state and local pensions with only enough to cover 77.9% of all the promised benefits this year, widening the gap between what’s owed to retirees and actual assets by nearly half a trillion dollars.
Public funds have seen losses of about 10.4% this year so far, with the country’s biggest fund—the California Public Employees’ Retirement System (CALPERS) reporting a loss of 6.1%, its worst since 2009. Fueled by steep declines in stocks and bonds brought on by rising inflation and concerns over a looming recession, the losses shaved off roughly half of the massive 25% gains the funds enjoyed last year during the market rally.
But the trouble isn’t so much the investment losses as it is the contribution rates that will now have to somehow go up because of those losses, the article details. Pensions that miss their annual return targets then have to then increase funding or decrease costs, either by raising employee contributions or halting cost-of-living increases. Analysts estimate that payroll contributions could go up 5% in the next 5-8 years.
Public pensions rely on annual gains to pay for the benefits that retirees have been promised. More and more, they have allocated into riskier enterprises such as stocks, private equity and high-yield bonds in order to achieve their long-term goals. Estimates say that state pension portfolios now hold more than 10% in private equity, holdings that are suffering now under inflation, the war in Ukraine, and the Fed’s tightening policies.
But while the market turmoil will likely result in elevated contribution rates, “…it doesn’t put the pension funds’ overall finances at real risk or the benefits being paid at any real risk,” Jean-Pierre Aubry of the Center for Retirement Research at Boston College told Bloomberg, because governments at the state and local levels have reduced liability growth by half in the last two decades, by narrowing benefits and raising contribution payments.