Unlike the federal government, cities and states can’t print currency, so when the money is gone, it’s gone.
Here lies the basic problem as neither of these two is producing at the level necessary to deliver the promised benefits. And the longer we go without fixing the problem, the smaller the chance becomes.
Underfunding a pension plan, along with over-stating the expected returns is a basic formula for disaster. The KPERS pension plan has been an expert at both of these strategies.
As much as we’d like to single out Gov. Brownback for his lack of funding to the pension plan, in reality the underfunding has been happening for years. An underfunded pension plan can only pay claims with dollars that exist. No one gets anything if the money isn’t there.
And the low funding levels would be far lower if they didn’t assume investment returns that are unreachable. How can an 8% return be reached each and every year when most pension plans typically have only 40-50% of their assets in equities, something life 40% in bonds, and the rest in real estate and alternative asset classes? Keeping 40% in bonds at 3% (on a good year) means everything else has to make 15%. Do you really want to bet that stock returns will average 15% over your retirement lifetime? And the scary part is that although financial markets have posted impressive gains since 2008, the pension plan funding ratios have been declining, although you wouldn’t know that with the rosy reports coming out of Topeka.
And keep in mind that if we do have another correction and the pension fund loses billions, then it will take more that the already ridiculous 8% assumption, just get back to where we were. (A 50% loss requires a 100% return just to get back to even).
Workers have every right to demand higher retirement benefits because to them, a promise to have a retirement benefit is in lieu of a higher salary, today. Elected officials have every incentive to promise those benefits, because the immediate cost of doing so is much smaller than the perceived value they give to workers, and they get the votes and cooperation of the workers. The problems that come down the road will be dealt with by other politicians, hence the phrase, “kicking the can down the road.”
The problem in Kansas (and probably many other states) and we’ve actually seen this, is that it is easy to shop around for a consultant who gives them whatever numbers they desire, but as time goes on, the bogus numbers get bigger and bigger. This has held true for budget numbers in general, and has been witnessed, personally, in the KPERS seminars given by representatives from Topeka. Although, understandably, some don’t want to hear that their state pension program is, or soon will be, insolvent, you certainly won’t get that indication from the KPERS representatives.
Where in other areas of financial planning there may be some sort of solution, the only one this author can recommend is “Start Saving. You may be on your Own.”
Tim Schumacher represents Strategic Financial Partners in Hays.