Pension Funds Face Alarming Danger of Collapse

The United Mine Workers of America is considering deep cuts in pension payments and reduced health coverage for about 100,000 retirees because of a $6 billion shortfall in its pension plan.

The Teamsters union is seeking permission to reduce benefits by as much at 30% for approximately 400,000 participants in its Central States plan.

Equally troubled are state and local government pension funds that are increasingly underfunded and facing higher numbers of Baby Boomer retirees. For example, Michigan teachers face an almost insurmountable crisis.

The Michigan Public School Employees Retirement System pension fund is $26.7 billion underfunded, and mind-blowingly has paid out more benefits than it has actual assets in 41 of the last 42 years according to some estimates. The Mackinac Center for Public Policy has estimated that, as a result, more than a third of Michigan’s school payroll expenses go to retirees, not those people actually teaching children in a classroom.”

South Carolina has a similar problem with its government pension plan. It covers roughly 500,000 people, or one of out nine state residents. As of now, it stands $24.1 billion in the red.

At the same time, the future of Social Security faces serious challenges. Recent annual cost-of-living increases have been reduced to a bare minimum or skipped.

For those people who counted on their pension to fund their retirement and Social Security to serve as a backstop, cuts to pensions will cause them to reduce their spending in a number of critical areas. This reduced spending in turn will drag down overall economic growth.

Social Security likely won’t be able to fill the gap. Analysts predict the Social Security Trust Fund could be exhausted by 2034, just 17 years away.

What solutions are available to forestall a major long-term economic crisis? Some advocate cutting benefits and increasing contributions to pension funds. Others insist on higher eligibility ages. Congress has long debated Social Security reform, but that issue has proven a political hot potato and none-starter.

The slowdown in global growth and lower yields in fixed-income investments will keep putting pressure on pension funds even with these potential fixes. Plus, increased longevity will have more and more people relying on pensions and Social Security for longer periods of time.

The real need is for our elected leaders to tackle the issue head-on and to quit kicking the can down the road. There are difficult choices to be made. They must be made in order to save our children and grandchildren from complete economic ruin.

Source: MarketWatch

Photo: Susan Melkisethian



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