America’s Public Pension System Remains Mired in Crisis

Thousands of Americans will lose their pension plan benefits if lawmakers fail to act. Over the past several years, we have seen pension investments shift from relatively safe holdings toward riskier assets. Although investing in assets such as hedge funds, private equity and “alternative” investments can increase returns, these investments are also hit especially hard during economic recessions. Before the pandemic, America’s pension plan system was facing many challenges; over the last year, they have only gotten worse.

The public pension system lost $1 trillion, a 21 percent loss for the fiscal year, following the COVID-19 lockdowns in March. In turn, these losses have added an overwhelming amount of stress on our public pension systems, as state and local pensions were already facing a $4.1 trillion shortfall. Public pension liabilities are on track to increase to $1.62 trillion this year, up from $1.35 trillion in 2019. These numbers are alarming as many governments now have less capacity to defer cost hikes or take mitigating actions because their non-asset cash flow has greatly declined.

Two of America’s most dire pension plan systems are in California and Illinois, two of the country’s largest states with large numbers of workers in defined contribution plans. In California, the economic effects of the virus are evident on the already strained public pension system. At the end of the first quarter, the California Public Employees’ Retirement System, reported that their asset value had dropped 10.5 percent since June 2019 — a loss of $35 billion. Matters have only gotten worse in Illinois and could soon hit a level of catastrophe if aid does not come forth. Moody’s estimates that Illinois’ pension liability will rise from $230 billion in 2019 to $261 billion in 2020.

CalPERS has recently become more involved with “notoriously risky tech stocks,” according to their SEC filing. In early November, CalPERS purchased $1.6 million shares of Nikola, $34 million of Nio, $221 million of Zoom, and $269 million of Tesla. Despite these developments, Truth in Accounting has placed California as the seventh-worst state in the country for financial transparency. This is largely in part because California claims to have a $23 billion budget surplus, but does not include its pension liabilities — adding this into account would put the state billions of dollars in debt.

Similarly, Chicago’s four main pension funds are currently underfunded and are facing a $30 billion crisis. Mayor Lori Lightfoot is planning to increase Chicago’s property taxes by $94 million beginning in 2021 in an attempt to minimize the risk faced by pension funds. She recently noted in a press conference that “our four pension funds are woefully underfunded. And some are literally selling off assets to meet their monthly obligations.” Moody’s has previously stated that Illinois will soon “pass the point of no return” on public pension debt. At the end of 2019, Illinois had the worst public pension debt in the United States, coalescing to $230 billion, which represents a debt to GDP ratio of 26 percent.

Many of the issues faced by California and Illinois are microcosms of the nation at large. States are facing difficult tradeoffs between their ability to provide essential services and their desire to reduce pension fund debt. This public pension crisis will require major investments in critical services, but public officials must be aware of the long-term consequences of reduced pension contributions. To meet requirements, pension payments must be increased in the coming years, likely resulting in reduced services for taxpayers, limited salary increases for public employees and in some cases, public sector layoffs.

Pensions, or defined contribution retirement plans, are still considered the gold standard and are often a major motivation for police and fire service workers on the state and local level. These services are critical components for the safety of our communities, and ensuring that emergency personnel will receive the retirement security promised following their careers of public service should be a given, not a negotiation.

This problem did not occur overnight, and both political parties are to blame. With that said, the solution should be bipartisan as well. The federal government has provided a lot of assistance over the past 10 months to a variety of sectors and individuals to help alleviate the fallout of the pandemic. Public employees have been asked to continue providing essential services throughout the pandemic, but their retirement security is still being used in a political game of chicken.

As public pension managers look for a way out, they may turn toward the federal government for help. Any federal action to rescue already underfunded pension plans could incite political backlash since it would be seen as a bailout for ill-managed funds. Despite the political consequences, the scale of the problem may require federal intervention in cases that involve a state’s insolvency. If and when a bailout is given, the federal government will have the opportunity to make demands for meaningful reforms.

America saw an uptick in COVID-19 cases late last year, causing many states to face another round of shutdowns. This will have negative effects on the economy. The prospect of a new presidential administration and the release of a vaccine will present some hope for investment returns, but hope is not the answer to the growing problem.

The Biden administration has already outlined plans for the ailing pension system. Late last year, Bridget Early of the National Public Pension Coalition noted that “there’s more information available based on what a Biden administration would want to do for retirement security” compared to the Trump administration. All in all, policymakers must keep the public pension systems in the forefront, because if they fail to do so, America’s retirees will suffer the consequences.

Kevin O’Connor is the former Trustee of the Baltimore County Employee Retirement System and an advisory board member of the Institute for Pension Fund Integrity

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