United States awash in growing pension problems
Aging workforce putting strain on pensions as many plan to retire
The problems that plague Detroit may soon become the bane of all major U.S. Cities. As an aging workforce plan to retire, stress is being placed on the pension system across the United States. Years of underfunded retirement promises to employees, which sent Detroit into crisis mode could now plunge other cities into a financial hole.
In spite of the recent national economic recovery, most states are still falling behind in closing their pension funding gaps.
"Sadly, [Detroit] is not the only municipality in trouble," Glenn Hubbard, economist, Columbia University Graduate School of Business dean and Mitt Romney campaign adviser, told CNBC. "A lot of state and local governments have too much debt, too generous public pensions. We need a national conversation on how to fix this."
Among the most pressing questions that must be addressed is: who will pay to clean up these financial messes? The most likely candidates include millions of retirees owed trillions of dollars in benefits, the bondholders who lent states and cities trillions more or local taxpayers who will pay in order to see deeper cuts in public services.
The problem is not about to just go away. "Moving pension plans is like steering a blimp: You turn the wheel and you go six miles before it starts to turn," John Tuohy, Arlington County, Va., deputy treasurer says. Tuohy chairs the pension committee of the Government Finance Officers Association. "In the political process, that kind of patience is very difficult."
Thankfully, many state and local governments have set aside enough money to make good on promised retirement benefits. Seventeen states have funded more than 80 percent of their projected pension liability, a level that's generally seen as financially sound. Most of the rest have been scrambling to make up investment losses inflicted by the 2008 market collapse and the shortfalls in sales, property and incomes taxes produced by the Great Recession.
In spite of the recent national economic recovery, most states are still falling behind in closing their pension funding gaps. Thirty-four states have seen their pension funds stretched further as they've failed to make the full contributions needed to meet the obligation of retirement promises. Shortchanging those contributions increases the risk that the fund eventually will go broke.
Hawaii, Alaska, Kansas, Rhode Island, New Hampshire, Louisiana, Connecticut, Kentucky and Illinois have now set aside less than 60 percent of what they need. Illinois has saved just 43 cents to cover every dollar of what it needs to pay 350,000 retirees and 500,000 current plan participants who are counting on a pension check.
Unions are adamant that the City of Detroit needs to "man up" and make good on promises made to public employees.
"Our members were promised certain things," Tom Ryan, president of the firefighters' union in Chicago says."They enter dangerous situations every day, and the only thing they want to look forward to when they can no longer perform their duties is to be able to retire with some sort of security. People expect us to be there, and we are always there. We expect that the city holds up their end of the bargain when we signed on to be firefighters and paramedics for the city of Chicago."
Without a pension check, public sector workers face a bleak retirement as many are ineligible for Social Security.
"If we were talking about doing this to people with Social Security there would be rioting in the street," Ryan says. "But because it's public servants on pensions it seems to be OK to do this."
© 2014 - Distributed by THE NEWS CONSORTIUM
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