Jim Sinclair’s Commentary
The endangered species in the Western World is on two legs – the pensioner.
No pension? You may still owe $30 000 on one- MSN Money
Many economists think the US’s debt, aging population and slow ecnomic growth spell disaster for pensions.
By MSN Money partner on Tue, Nov 8, 2011 4:35 PM
Pension accounts for state and local government workers are underfunded by $4 trillion, according to one recent analysis. If America’s households were to split that tab today, each would have to kick in $34,000.
Don’t have that kind of cash on hand? Another option is to chip away at the shortfall over 30 years starting now. That would cost households $1,400 a year beyond what they pay in taxes today.
A pension, for those who aren’t familiar with one, is like a 401k plan in reverse. With a 401k, or defined contribution plan, a worker knows how much he socks away, but not how much he will have at retirement. That part depends upon investment returns. With a pension, or defined benefit plan, a worker is told how much he will receive in retirement. It’s up to the pension to put aside enough today. To do that, pensions guess about future returns. The higher the returns they assume, they less money they must save today. And therein lies the problem.
Most states assume a yearly return of around 8%, says Kil Huh, who manages fiscal research for the Pew Center on the States, a think tank. "In past decades, when investment markets boomed, they were able to achieve those returns," he says. "Now they’re not even coming close."
Indeed, whether states and local governments have a funding problem under current rules depends on what markets do in coming years. Pensions have two-thirds of their money invested in risky assets like stocks, real estate and hedge fund positions. If the next 20 years could be counted on to resemble the 1980s and 1990s, when stocks returned double their historic yearly average, then states would be flush today.
