POLICE Magazine

AUG 2018

Magazine for police and law enforcement

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50 POLICE AUGUST 2018 P ublic pensions across America are largely underfunded. A 2016 study by e Pew Charitable Trusts found that cumulatively, state pension funds across the U.S. faced a $1.4 trillion deficit. at was a $295 billion increase from 2015, and the 15th annual in- crease in pension debt since 2000. is prob- lem is growing, and it puts the retirement in- comes of public servants at risk. Let's take a look at the problem, explain why it's happening, and discuss what you can do to protect your retirement income. THE PROBLEM In 2016, total liabilities of state pensions were $4 trillion, while they only had $2.6 trillion in assets to make good on their promises. Five states—Colorado, Connecticut, Illinois, Kentucky, and New Jersey—were less than 50% funded. Kentucky and New Jersey were in the worst situation, with only 31% funding. Only four states: New York, South Dakota, Tennessee, and Wisconsin, were at least 90% funded, with Wisconsin leading the pack at 99% funding. WHY IS THIS HAPPENING? There are two main causes for the growing pension funding gap: poor rates of return on investments and state govern- ments failing to set aside enough money to fund the pension as planned. Poor rates of return have caused the total asset value of public pensions to nosedive. In 2016, the median assump- tion for annual investment returns was 7.5%, but the median actual return was only about 1%. Even though state pension plans have lowered their assumed rates of return (in 1992 it was over 8% annually), they haven't been able to make up the difference. Despite large declines in the expected rates of return for bonds over the last 20 years, pension plans' assumed invest- ment rate of return has remained relatively constant. From 1992 to 2012, the median pension fund's assumed rate of re- turn decreased from 8% to 7.75%. Compare that to the yield on 30-year Treasury bonds, which fell from 7.67% to 2.92% over the same period. Public pensions now assume they'll beat the 30-year bond by 4.83%, compared with the expecta- tion 20 years ago of outpacing bonds by only 0.33%. Historically, because of strict regulations, public pen- sion funds invested primarily in "safe" fixed-income invest- ments, like bonds. In 1952, 96% of public pension assets were invested in fixed income or cash. In the 1980s and 1990s, regulations loosened and allowed more high-risk investments, like stocks. Pension plans began reallocating their portfolios away from fixed income and into stocks. By 1992, only 47% of pension assets were invested in fixed-income or cash. And by 2012, that proportion fell All pension funds have their ups and downs according to the market, but public employee pension funds are dangerously underfunded. THE GROWING GAP IN PENSION FUNDING Government retirement programs may not be as safe as you think. Here's what you can do to protect your future. Cop Finance ADAM DORAN PHOTO: GETTY IMAGES

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