While everyone in Washington is fretting about the U.S. debt ceiling, here’s another $1.5 trillion that everybody forgot about.
That’s the sea of red ink in the 100 largest public sector pensions, according to the latest report from consulting firm Milliman, which tracks the numbers.
You know you’re in trouble when $1.5 trillion in debt can be “overlooked.”
A trillion here, a trillion there, and pretty soon you’re talking about real money.
Milliman, which looks only at the 100 biggest public sector pensions, says their overall funding levels “improved slightly to 74.8% as of April 30 from 74.5% a month earlier.”
Or, to put it another way, they are still short by about 25 cents on the dollar.
This is despite the rise in interest rates in the past year and a half, which ought to be helping the situation. That’s because when interest rates are higher, pension fund managers are allowed to reduce the value of future liabilities in today’s money.
Of the 100 biggest plans, Milliman estimates that only five are fully funded and only 17 have at least 90 cents of assets for each dollar of liabilities.
This will end well.
A quarter of the funds have less than 60 cents on the dollar.
The good news — if you can call it that — is that if history is any guide the state and local employees will end up getting their full pensions.
It will be the taxpayers who have to find the extra money.
Will it come from spectacular investment returns instead? Don’t count on it. Public sector pension funds have been pouring money into so-called “alternative investments,” such as hedge funds, private-equity funds, and the like, with that hope in mind.
These investments have been terrific — for the lightly-taxed multimillionaires who run these high fee alternative investment funds. Whether public-sector workers—or, ultimately, the taxpayers — see any benefit will be another matter.
By Milliman’s numbers, thanks to all these fancy investments, the top 100 public sector funds have overall earned an investment return of 5.0% so far this year.
If they’d held that money instead in a simple portfolio consisting of 60% Vanguard Total World Stock Index fund
VTWAX,
and 40% Vanguard Inflation-Protected Securities Fund
VAIPX,
over the same period, like somebody in the cheap seats, they’d have earned… 6.6%, or a third more.
Never mind. The taxpayers will find the money.
