New York Estate Planning & Elder Law Blog
A recent report by Bloomberg warns that states across the country could face a serious pension crisis much sooner than many expect or wish to acknowledge. The research points out that within the next five to 10-years, many large states could find themselves in insolvency due to enormous unfunded pension systems worth hundreds of billions of dollars, unless major changes are made to the system very soon.
While some states are in much better financial shape than others, having set aside the necessary assets to pay pensions for the near future or having the luxury of enough time to make requisite changes, others may need to see the writing on the wall. States with pensions promising to pay large sums of money to retirees will be in much worse shape, as cash flows and current pension reserves to do align with actuarial problems.
New York is one of the few states named by Pew with at least 90 percent pension funding in 2016, along with South Dakota, Tennessee and Wisconsin. Nearby New Jersey had one of the least funded pension systems, with only 31 percent of their $280 billion liabilities funded. States and cities with serious pension liabilities could find their systems break down in the near term if markets do not perform as expected and still fall apart in the next decade even if the stock market does well.
Analysis by Pew Charitable Trusts found that in fiscal year 2016 for example, the funding deficit for state public pension systems rose to a record-high $1.4 trillion, a nearly $300 billion increase from the previous year. In the public sector, retirement funds reported only $2.6 trillion in assets to cover total pension liabilities of $4 trillion, due mostly in part to shortfalls in investment returns and inadequate state contributions to pension systems.
As it currently stands, deficits for 2017 are expected to decrease due to higher returns on investments, thanks in part to a more robust economy as states allocate more of their assets to higher risk investments such as equities, hedge funds, real estate and commodities that can produce higher returns. Pew’s report only looked at state level pensions with significant investment and although some of the news promising for a select few states, municipalities large and small are feeling pension crunch and laying off portions of police and fire departments.