Pulitzer Prize-winning journalist Paul Ingrassia and Staff Writer Imogen Rose-Smith wrote a disturbing account of the potential  risk to the country’s pension system in a lengthy article for institutional investor titled  “Trillion-Dollar Pension Crisis Looms Large Over America“ . The authors say: “As the U.S. slowly pulls itself out of recession following the worst financial debacle in more than 70 years, another potential crisis is looming on the horizon. The country’s pension system — both public and private plans — faces trillions of dollars in unfunded liabilities and has little hope of ever being able to meet them.”

We asked Grahall’s Robert Cirkiel for his take on this. 

This is generally acknowledged to be an issue, but more so for the public sector.  In fact, the unfunded liability for Social Security alone is $17.5 Trillion.  Together with Medicare, the unfunded liability is anywhere between $53 Trillion and $107 Trillion depending who you ask.  This is all off-balance otherwise US debt would be rated as junk.  It is junk but it’s just not rated this way. 

Private sector pensions have been underfunded for a while too but not as severely and besides, private sector pensions are not all that prevalent anymore.  Back in 2006, the Pension Protection Act was enacted requiring all private pension plans to be adequately funded within seven years.  That was when the market was GOOD!  A crash wasn’t even anticipated in the Act’s language.  If you follow the news, private pension plans one-by-one are going the way of the dodo bird.  They either terminate, freeze, or are taken over by the Pension Benefit Guarantee Corporation, the pension version of the FDIC.   This movement away from defined benefit pension plans is logical.  Companies cannot allow their pension plan liability to bankrupt them.  (Consider this another example of the “efficient economy”.) But at least these private pension plans are insured. 

The public sector has always relied on “the unbridled taxing authority” of the sponsor.  In fact, the taxing authority has always been the counter argument to the existing of a funding crisis in that it implies that there is no need to prepay the unfunded liability and that like Social Security, the funding need not be more rapid than “pay-as-you-go.” 

For more on Grahall’s and Robert Cirkiel’s perspective on the pension landscape the relationship between retirement savings and workforce strategies and how to fix the problems read:

• The Haves vs. The Have Not 
• What It Really Means to Have Only a 401(k) Plan for Your Retirement
• 401k Plans are Easy to Fix: Use A Hammer 
• From Here to Eternity 
• It’s Complicated 

Contact Robert Cirkiel at robert.cirkiel@grahall.com