A Looming Crisis

A Looming Crisis | PIonline.com

There is a financial crisis looming potentially as big as the current financial market emergency. This crisis is the unfunded retirement benefits for pensions and medical care.

This lack of funding is found in corporate, public and union pension and retiree medical plans, the Pension Benefit Guaranty Corp.'s insurance program, as well as Social Security and Medicare.

In the midst of the current financial market crisis, this might not appear to be the opportune time to raise the issue. But when has the time been fitting for plan sponsors and policymakers to grapple with it? During the bull markets of the 1980s and 1990s, little progress was made to better secure retiree benefits.

The current efforts to reform the financial system to avert further crises should awaken policymakers to the need to also address the looming crisis in the retirement benefit funding system.

This crisis is still on the horizon, meaning there is time to work out a solution, although implementation will certainly have to wait until the credit crisis has passed, the financial markets have stabilized, the economy has regained its footing and economic growth has strengthened.

But the longer the wait to solve the retirement funding crisis, the more costly the solution will be. The current lack of urgency in retirement benefit funding masks the dire need to begin tackling the issue. Many pension and medical benefit funds have the wherewithal to pay benefits in the shorter term, encouraging procrastination among policymakers.

The retirement funding crisis has threatened the ability of many corporate plan sponsors to stay viable in the long term, and has weakened their competitiveness in a global marketplace. Some individual plan sponsors — like the auto companies — are in a weakened financial situation in part because of the funding issues, even as they already have curtailed retirement benefits for the non-union part of their work force.

The funding crisis affects many public sponsors as well, harming their ability to create an economic environment to foster growth in employment and income through effective, necessary social services, and avoid major tax increases and cuts in essential programs.

The Pew Charitable Trust's study of public retirement benefits released last December, and other studies, paint a dire situation in public retirement program funding.

Over the next 30 years, the states will have to spend an estimated $2.73 trillion to pay pensions, health care and other retirement benefits for their employees, the Pew study found. That total includes an estimated $2.35 trillion in pensions and $381 billion for retiree health care and other non-pension benefits for state employees only, excluding those benefits for teachers and other public employees. “To their credit, states have socked away enough to cover about 85% of the pension bill,” the study said. “But there is very little put aside for non-pension benefits.” All told, states face about $731 billion in unfunded bills coming due.

Public sponsors generally weren't even accounting for the cost of their retiree medical obligations until the introduction of Government Accounting Standards Board statements 43 and 45.

This is a desperate situation that is solvable. The cost, however, will depend on the type of solution and how soon it is adopted. Much of the work has to be done at the individual sponsor level. A concerted effort by sponsors, along with their consultants, as well as academic theorists, and encouraged by a new latitude in legislation, can provide creative ideas for better securing retirement programs.

Benefits have to be tailored to affordability. Plan sponsors must commit to funding them on an actuarially sound basis, especially for public sponsors that have more latitude in funding than ERISA-regulated corporate sponsors.

Current plan designs and poor funding decisions have made the affordability and security of the programs tenuous if not impossible. Poor accounting for the costs also has contributed to the weaknesses.

Better accounting for promises will enable sponsors to determine more accurately the affordability of benefits. Armed with better information on the cost of benefits, sponsors can seek creative changes in plan design or financing to better secure programs, avoiding a big government bailout or a nationalization of retirement programs.