As a financial planner, I try to make people aware of the existential threats we face as we all grow older. These threats are things that “might” happen, may not happen, but if they do can be devastating to individuals and families. If you are already dead, you can skip this blog post, but if not, then…
No one seems upset that modern medicine has resulted in more of us living longer lives than could have been expected when we were born. Along the way, many of us worked for organizations such as the State of Florida or somewhere in corporate America. Or maybe the City of Gainesville or the Sherrif’s Department. We participated in a pension plan that promised benefits based on our years of service and sometimes our level of pay.
The promise typically included a schedule of monthly payments for either our lifetime, a number of years, and might have included a contingency benefit to our spouse. All well and good. But the calculations to make those promises did not take into account the fact that our lives now end much later than they did in years past.
The net effect of this is a shrinking of the pool of money available to make those payments. I’m not talking about Social Security here, where there is an obvious parallel, but the pensions paid to the millions of Americans who toiled for years at large companies like General Motors and the hundreds of thousands of smaller places.
Non-public pension plans are grossly underfunded across this nation. Part of that is the very low interest rates that ‘safe’ investments earn and have earned for the past decade. And pension funds are required to invest their pools of money in ‘safe’ investments. Revenue is going to have to come from somewhere or there is likely to be rioting in the streets.
My personal opinion, having watched this growing problem for a number of years, is that the author is somewhat blind to the problem and suggesting there is no reason for alarm. Tell that to the elderly couple whose pension check from a local plumbers union somewhere in Ohio just got cut in half.
There are millions of people across these 50 states with situations like this and to pretend they don’t exist is a potential violation of the social contract all of us have as citizens of these United States. Unfortunately, too many of them rely on Fox News to help them interpret what is going on.
April 10, 2015 by Marlene Y. Satter
Certain mortality projections would increase life expectancy by 2.3 years and reduce the funded ratio of the nation’s public pension plans to 67 percent.
That’s according to a just-out brief from the Center for State and Local Government Excellence, “How Will Longer Lifespans Affect State and Local Pension Funding?” which concludes that, while the impact of longer lives is not exactly a positive for funds, there’s no imminent threat to pension funding levels.
It explores what public plan liabilities and funded ratios would look like under two alternative scenarios:
1. If public plans were required to use the new mortality tables designed for private sector plans; and
2. if public plans were required to go one step further and fully incorporate expected future mortality improvements.
The brief’s key findings include:
• Using the private-sector standard, public plans underestimate life expectancy by only 0.5 years, reducing the 2013 funded status of state and local plans from 73 percent to 72 percent.
• Incorporating future mortality improvements would increase life expectancy by 2.3 years and reduce the funded ratio of public plans from 73 percent to 67 percent.
Plans’ liabilities are affected, of course, by the longevity of their members, and the brief explores the degree to which liabilities are affected, calculating that “state and local pension plans would see their liabilities increase by 3.5 percent for each additional year of life expectancy.”
When the differences among longevity tables are factored in, it becomes clear that some plans, because of the way they calculate life expectancy, will be more greatly affected by a change from one table to another, while other plans will not see such drastic effects.
The public sector, the brief said, is going to great efforts to make sure its life expectancy assumptions are up to date. Reassuringly, the brief said, “The question underlying this analysis is whether outdated mortality assumptions are a serious problem among state and local plans. The answer appears to be ‘no.’