The Looming Problem With Underfunded Public Pensions.
Public employees, which include teachers, postal workers, firefighters, and other government employees, are most likely covered for their retirement under a pension plan. The vast majority, roughly 80 percent, of all federal and local government employees have such a pension plan, but that doesn't mean retirement is going to be a smooth ride for those individuals.
It has been estimated that a $1 trillion gap exists between the amount of money that is promised to workers in the future and how much money those pension funds have, and some experts have said the gap could be as much as three times that size. State pensions aren't subject to the same pension laws as private firms, so there is a not much reliability to the way they calculate liability.
Some states are worse off than others, such as Kentucky, Connecticut, and Illinois. It has been estimated that less than half of their debts are covered by their current funds. Some states, however, aren't doing so bad. North Carolina and South Dakota almost have enough to pay every liability they owe.
One of the reasons that state and local governments have funding problems is the miscalculation on the rate of return. For example, the nation's largest pension fund, the California Public Employees’ Retirement System, earned 0.6% in the last year, below its 7.5% target. The California State Teachers Retirement System, which also projected for a 7.5% annual return, instead earned 1.4% gain for the year.
The New York State and Local Retirement System, which ended its fiscal year on March 31, reported a gain of 0.2% the projected rate of return was 7%. It's likely that other pension funds have similarly failed by a wide margin to hit their projections, given that most government pension funds rarely perform significantly better than the broader market.Those states that have tremendous gaps should work to balance the equation by reevaluating the increases for cost-of-living. They could also raise the retirement age or increase other requirements for receiving benefits. Many states are looking to get away from pensions altogether in exchange for standard 401(k) packages.
To add to public pensions stress is that working as a government employee and therefore earning a pension is that it could reduce how much Social Security pay that employee can receive. This is called the WEP, or windfall elimination provision. That means that if you worked for the government and earned even a small pension, your Social Security pay could be reduced. There are 15 states where the WEP affects federal and state employees, but any worker who has provided more than 30 years of earnings toward Social Security is exempt from the provision.
Those who have spouses that might benefit from Social Security survivor payments might see a reduction in those benefits if the worker ever had a government job as well. In normal situations, a surviving spouse gets 100 percent of the deceased spouse's benefits, and if both spouses are still living, the spouse gets 50 percent of the worker's benefits. The GPO, or government pension offset provision, reduce the survivor benefits by two-thirds of the pension awarded to the worker. These provisions were put in place to ensure that no workers earn double benefits after retiring.
Pensions are also decreasing in general value since government employees are much more mobile than they once were. It has been estimated that of all new teachers, only about 20 percent of them will receive the maximum benefits from their pension plan. The other 80 percent will experience reduced benefits because of changing jobs.