Pensions Crisis News: Reforming the System for Better Outcomes

The pensions crisis is a pressing issue that affects millions of people worldwide. As of 2022, an estimated 1.4 billion people globally lack access to a pension, with many more at risk of inadequate retirement savings.

The current system is often criticized for being overly complex, with multiple layers of administration and high fees eating into workers' retirement funds. This can lead to a situation where people are left with insufficient savings to support themselves in retirement.

One possible solution is to introduce a more streamlined and standardized pension system, as seen in countries like Australia and Denmark. These systems have been shown to be more effective in providing a secure retirement income for citizens.

A key aspect of reforming the pension system is to ensure that workers' contributions are invested wisely and efficiently, with a focus on long-term sustainability rather than short-term gains. This could involve introducing more transparent and accountable investment practices.

The public pension crisis is a pressing issue in the United States, with over 10% to 20% of the largest state and local pension plans at risk of near-term or long-term insolvency.

Somewhere between 10% and 20% of the largest state and local pension plans in the United States are at risk, according to an estimate from a group of retirement policy experts using data from 2019.

These pension funds are categorized as either "Deep Red" or "Red", with "Deep Red" indicating a high risk of insolvency in 20 years and a low funded ratio, and "Red" indicating a history of underfunding and a low funded ratio.

Here are the key characteristics of "Deep Red" and "Red" pension funds:

The costs of paying for growing unfunded liabilities are a major driver of the pension crisis, with state and local pension funds reporting over $1 trillion in unfunded liabilities in 2020.

The growth in payments toward unfunded liabilities is a major concern, as it has led to higher costs for states, cities, and school districts, and has even influenced education quality, programs, and experiences for students.

In California, for example, school board members reported cutting arts and music programs, taking out loans, delaying school building upgrades or technology purchases, and increasing class sizes due to growing teacher pension costs.

This is not the case in every state, however, with some states having very low pension costs relative to their K-12 budgets.

Texas provides a model for nationwide pension reform through its Pension Review Board, which exercises oversight and checks poor decision making by public pension plans.

Public employers have obscured the real long-term costs of defined-benefit pension plans by using an inappropriate discount rate, enabling politicians to kick the can down the road.

A defined contribution plan, similar to those offered by private employers, could be a more expensive but more stable option. Employer contributions could still be generous, but the plans would not guarantee a preset lifetime benefit.

Public employees are surprisingly receptive to this model, with nearly 90% willing to switch to a 401(k)-type plan under some circumstances.

North Carolina has specific laws that protect pension benefits for certain groups, including teachers, public safety officers, and public workers.

These protections are rooted in state law and have been affirmed by court rulings.

North Carolina teachers, public safety officers, and public workers' pension benefits are entitled to certain protections under state law and affirmed by court rulings.

Defined-benefit pension plans are expensive, with public employers contributing up to 24% of payroll, compared to 3-5% in the private sector.

The biggest problem is the use of an inappropriate discount rate, which obscures the real long-term costs of these plans. This has allowed politicians to kick the can down the road for a long time.

Rauh says that without reform, state and local governments will increasingly have to draw on tax revenue to meet their obligations, crowding out spending on things like education and public safety.

Cities could go bankrupt, and states like California could see a continued exodus of high-income taxpayers.

But a change of plan is possible. States and cities could move to defined contribution plans similar to those offered by private employers.

These plans would be much less expensive to run because they would not guarantee a preset lifetime benefit.

A recent survey of over 7,500 public employees found that nearly 90% would be willing to switch to a 401(k)-type plan under some circumstances.

More than half said an employer contribution of 10% of their salary would be sufficient.

The survey suggests that public-sector workers are open to change and willing to work with their employers to find a solution.

Here's a comparison of the funded ratios of some plans in the table:

These plans have very different funded ratios, with some struggling to meet their obligations.

Texas has a model for pension reform that can be applied nationwide. The Texas Pension Review Board (PRB) is a key component of this model.

The PRB exercises oversight of public pension plans, helping to prevent poor decision making. This oversight is crucial for ensuring the long-term sustainability of pension plans.

One of the main functions of the PRB is to review and approve pension plans, making sure they meet certain standards. This helps to prevent abuses and ensures that pension plans are managed responsibly.

By providing a model for reform, Texas is showing the way forward for other states to follow. Its approach to pension reform could be a game-changer for the nation.

The pensions crisis is a complex issue, but let's break down the market and economic factors at play. Many experts point to the decline of defined benefit plans as a major contributor to the crisis.

Low interest rates have made it difficult for pension funds to grow, resulting in reduced returns and increased costs. This has put a strain on pension funds, making it harder for them to meet their obligations.

The increasing life expectancy of retirees has also contributed to the crisis, as pension funds are now facing the challenge of providing for people living longer. This has led to a significant increase in the number of retirees, putting pressure on pension funds.

The current economic climate has also made it difficult for individuals to save for their retirement, with many people struggling to make ends meet and put money aside. This has resulted in a lack of savings and a growing reliance on state pensions.

A pension fund's performance is often measured against a benchmark, which is a widely available measurement of how other investors have performed or how financial markets have performed. However, some pension funds choose benchmarks that are too easy to overperform against, allowing them to avoid making important decisions about improving their investment strategy.

According to data, 41% of a pension fund's unfunded liabilities between 2000 and 2019 can be attributed to underperforming investments, after accounting for fees. This has resulted in over $567 billion in pension debt for the largest state pension plans.

Pension funds often assume they can earn investment returns between 7% and 8% a year, but they don't. This underperformance has created a significant problem for pension funds, making it harder for them to ensure responsible funding policies.

Here are some key metrics to consider when evaluating a pension fund's health:

These metrics can help determine whether a pension fund is resilient, fragile, or distressed.

Automatic enrolment has been a great success, but it's not enough. The pension participation rate among employees jumped from about 50% to 75% after its launch in 2012.

Employers must pay 3% of the minimum contribution rate, while employees pay the remaining 5% unless they opt out. This default enrolment rate is inadequate, as it might just about generate a retirement pot of £150,000 for someone who works continuously for nearly 50 years and earns an average wage over that time.

That sounds like a lot of money, but it goes quickly when spread over 20 or more years of retirement. The current default rate is not enough to make retirement care costs manageable, as shown by the government's social care reforms with a lifetime care cap of £86,000.

Doubling savings rates could have the pension pot grow to £300,000, making care costs more manageable. A higher savings rate would also make room for the messy reality of life, such as career breaks or part-time working.

Pension funds pay out too much in fees, a common concern for public pension plans. This is a real issue, as seen in the case of Pennsylvania, where a state commission issued a 400-page report on best practices for managing their statewide retirement systems.

The report highlighted the fees paid by the state's pension plans as a key area of focus. Similarly, New York City's comptroller found compelling data revealing that after accounting for fees, city pension plans were underperforming.

Investment managers for pension funds often adopt "bogus benchmarks" to measure themselves against. This allows pension funds to avoid making important decisions about improving their investment strategy.

Here are some key statistics on the sources of unfunded liabilities for pension funds:

Pension funds have a more than $1 trillion funding shortfall, as of 2022 data. However, fees are not the main reason for this shortfall.

The use of unrealistic assumed rates of return is a major issue for pension funds. This is evident in the fact that pension funds assumed they could earn investment returns between 7% and 8% a year on average, but they didn't.

Gov. Mark Gordon holds daily conference calls with his cabinet to monitor the legislative session, indicating the importance of staying informed about pension fund developments.

Employees in mid-life can benefit from support from their employers, helping them stay in work longer and plan for retirement.

Employers can take a proactive approach by providing resources and guidance to their employees, much like the report on mid-life support suggests.

State employees in Wyoming are bracing for a significant change as the proposal to increase their contributions to the pension fund gains momentum.

Every day during the legislative session, Gov. Mark Gordon has held a conference call with each member of his cabinet to monitor new developments in the proposal.

State employees are facing higher contributions to the pension fund, which is a result of the growing unfunded liabilities in pension plans.

State and local pension funds reported more than $1 trillion in unfunded liabilities in 2020, and this number is expected to rise again once 2022 numbers are formally reported.

The growth in payments toward unfunded liabilities is the driving factor behind the increasing costs for states, cities, and school districts.

In California, school board members have reported cutting arts and music programs, taking out loans, delaying school building upgrades or technology purchases, and increasing class sizes due to growing teacher pension costs.

The share of state education K–12 budgets used to pay pension costs increased from 7.5% to 14.4% between 2001 and 2018, leaving fewer resources for schools and students.

Providing mid-life support to employees is crucial for their well-being and career longevity. This can help them stay in work for longer if they want to, plan for what they will need in retirement, and think ahead about their future needs.

Employers can offer flexible work arrangements, training, and career development opportunities to support mid-life employees. By doing so, they can help their employees stay engaged and motivated.

Research highlights the importance of providing support to employees in mid-life. This can include offering access to health and wellbeing services, financial planning tools, and mental health support.

By investing in mid-life support, employers can benefit from increased employee retention and productivity. It's a win-win situation for both the employer and the employee.

Work pressure increases due to the stalling of real wage growth, reflecting a deeper trend of poor productivity in the UK.

This stagnation of wage growth is of paramount importance because retirement income is determined by the accumulation of savings made over a working lifetime of 40 years or more.

The potential for automation and AI remains uncertain, it could boost productivity and wages, but also lead to widespread job losses.

Economies have always adjusted in the past, but the transition can be painful and may leave cohorts of workers with patchy careers, even lower savings, and strained retirements.

Women remain much more likely to work part-time, with 75% of part-timers being women, which lowers their lifetime earnings and associated pension savings.

The average pension pot for a man aged 65-74 is £260,000, while a woman of the same age has an average pension pot of £130,000, highlighting a significant gender inequality in the workforce.

One in five adults who retired in the last five years have admitted to finding it difficult.

Retirement transitions can be challenging, especially if not properly planned.

Millions of pensioners on very low incomes will have to make do without a Winter Fuel Payment this year.

Pensioner poverty is a real concern, and further pension reforms could exacerbate the issue.

A recent change in the eligibility rules for the Winter Fuel Payment has raised the importance of older people signing up for Pension Credit if they meet the criteria.

Signing up for Pension Credit can make a big difference in ensuring older people receive the support they need.