I love how the politicians sneak items into legislation where the public doesn't notice. They have a tendency to sneak in small solutions to major problems. This latest spending plan has a provision in it to be a rescue attempt for as many as 200 multi-employer pension plans. What are the politicians secretly worried about?
The reality is that so many pension plans are in trouble. They are supposed to be paying out a certain amount of money that they just don't have in their plan.
US state and local government pension plans might be underfunded as much as 5 trillion dollars.
Public pension plans are funded in two ways.
First, is through investment growth. The problem here is that the market cycles and it looks like we are heading back into a bad cycle. What happens if these plans lose -50% in value? Right now, the plans are assuming an average rate of return of 7.6% a year. If you look at the S&P 500 since 2000, the average is a little over 5% a year and we have been through what looks like the best of the cycle to earn money.
Second, they are funded through taxpayer money. With the demand for taxpayer money, that becomes a funding concern as well.
This problem also faces the private sector. A study shows that 93% of private pensions are not fully funded.
Take for example General Electric. Due to mismanagement of their pension plan, they are running a deficit of 31 billion dollars. This is a plan that over 600,000 current and future employees depend upon.
This problem is a future problem that I think most are ignoring. It seems to be a problem where it will be dealt with when it happens. In the meantime, let's hope it gets better. The problem is that the numbers are the numbers and they point to a problem that our government will not have an answer. It is going to take way more than just sneaking a small solution into a spending plan.
Bob Brooks is a Financial Adviser who practices in the DFW area. He is also the host of the Prudent Money Radio Show. If you want to contact Bob please call 972-386-0384 and ask to speak to Judy. You can also email her at Judy@prudentmoney.com.