BREAKINGVIEWS-Finance 101 would get U.S. pensions back on track
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Agnes T. Crane
NEW YORK, June 27 (Reuters Breakingviews) - A little Finance 101 would get U.S. pensions back on track. Illinois, Connecticut and New Jersey are among the states that neglected the most powerful force in retirement saving: compound returns. Their pension burdens are much heavier in part because they short-changed funds by not contributing the recommended amount, according to a new study from Moody's Investors Service. It's time to revisit the basics.
The underfunding problem in the United States has only been getting worse. The latest figures from the Pew Charitable Trusts put the collective shortfall at some $1.4 trillion. Some states, however, are in decidedly worse shape than others.
The Land of Lincoln is at the bottom of the list. Illinois decided nearly two decades ago it would put in less money today and make up the difference tomorrow. Tomorrow never really came, though. According to Moody's, the state's pensions are now so underwater that lawmakers would have to raise an additional $1.40 for every $1 of revenue to meet its obligations. Connecticut, New Jersey and Pennsylvania would have to more than double their revenue to plug shortfalls.
Others hewed to the refrains of investment sages like Burton Malkiel, who preach the virtues of time, even with only modest returns, when it comes to saving. New York, Florida and Ohio diligently kept up with their pension payments. They'll need less than 25 cents of every dollar already coming into government coffers to cover the retirement benefits of their workers.
Delaying pension contributions is of course politically expedient, especially when budgets are tight. Unfortunately, it also surrenders a lot of easy money. At an interest rate of 5 percent, a state contributing $1 billion a year instead of $1.2 billion to its fund would wind up $6.9 billion short in 20 years. It's simplistic math that has been lost on too many governors, who obviously need a refresher course.
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- States with the largest pension burdens have a history of not contributing enough to their public pensions, according to a study released on June 27 by rating agency Moody's Investors Service. Conversely, those states with the least burden have continued to contribute the amount recommended by actuaries even if it strained budgets.
- Moody's measures the burden of public pensions by comparing a state's net pension liabilities with government revenue.
- Illinois has the heaviest burden with pension liabilities 2.4 times larger than the state's existing revenue, according to Moody's. That means the government would have to raise an additional $1.40 for each dollar of existing revenue to meet its pension obligations. Connecticut and New Jersey would have to more than double revenue to meet theirs.
- The ratio for states like Ohio, Florida and New York, which kept up with their pension contributions, would only need to earmark less than 25 cents of every dollar already being raised.
More wealth, please [ID:nL2N0EU0OD]
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- For previous columns by the author, Reuters customers can click on [CRANE/]
(Editing by Jeffrey Goldfarb and Martin Langfield)
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