Thursday, April 8, 2010

Pension Shortfalls & Baby Boomers

Corporations based in the United States, unlike most developed nations, have abandoned the concept of “defined benefit plans”, most commonly referred to as pensions, for most occupations. However, there is one large part of the economy where pensions are still used: the public sector. Most commonly pension funds provide benefits via a calculation based upon the amount of time served multiplied by salary at retirement multiplied by an accrual rate. US corporations first offered pensions following WWII, but as life expectancies began to rise they sought to extricate themselves from agreements that proved to be very costly. Government employees have been able to preserve these arrangements, and with the oncoming wave of Baby Boomer retirees, many pension funds are in danger of becoming insolvent. The state of California pension fund is facing an unfunded “pension time bomb” of $500 billion dollars.

In Minnesota the Minnesota Center for Public Finance Research and the Minnesota Taxpayers Association released a joint reportin 2006
that detailed the current condition of major public pension plans. The study analyzed the three primary pensions: MSRS or Minnesota State Retirement System General Plan; PERA or Public Employees Retirement Association General Plan; and TRA or Teachers Retirement Association. It revealed unfunded liabilities, and contribution deficiencies to each of the major plans. Prior to the release of this study in 2006 policy makers had passed laws to remedy these shortfalls, however the recent recession has been very hard on the financial bottom line for these funds, and each is in worse position than when the article was released.

One of the primary dangers of the pension shortfalls is that the approved fixes require increased local government contributions. According the 2006 report local governments throughout the state would have a $380 million dollar spending increase through the end of the decade. This was a challenging prospect even prior to the massive Minnesota state budget deficit that led to millions in local government aid cuts, but after local communities lost large amounts of revenue, it becomes even more complicated. Municipalities are faced with the thorny decision of cutting services or raising taxes, neither of which is a popular decision with citizens. One common, though contentious, solution currently being supported is to follow the lead of corporations and privatize the public employee retirement system. Supporters of this proposal point the potential cost savings in the long run as a reason to take this step, however, in the face union opposition, passing such a measure will take a severe pressure. However, the situation could reach crisis level in a few years as the projected budget deficit for the state is set to increase and even more baby boomers will be leaving the workforce and collecting their pension checks.

No comments:

Post a Comment