“Public pensions face even more risk exposure as they try to
plug funding gaps.”
In 2000, most government retirement plans in America were fully funded. However, as pension plans voted to increase benefits or reduce government contributions, things began getting shaky. By the time 2016 rolled around, many government employees were stunned to discover that their plan had only two-thirds of the assets needed to cover obligations.
There’s a challenging road ahead for public pensions. Although things have improved in the last few years, most public pension plans still lack enough assets to pay for future benefits. Sluggish economic growth and weakened, volatile markets create low-returning environments that can significantly impact everything, including once-sacred pensions.
It is worth noting that pension fund investment portfolios often fall short of their target returns. They can also become underfunded due to mismanagement or fraud. Unfortunately, most public employees believe their pension plans will consistently perform according to expectations. This belief causes some federal and state employees to become complacent in finding alternative strategies so they won’t run out of money when they retire.
Could your public sector pension run out of money to meet future obligations?
With only a few years of under-performance, pension funds can get horribly out of whack. A combination of rising interest rates and market volatility may decimate pension plans. For example, in the 2022 post-pandemic downturn, the country’s largest public pension fund, The California Public Employees’ Retirement System (CALPERS), lost nearly $30 billion. Many other state pensions, including those in New Jersey and Illinois, ended 2022 in the red. Pension shortfalls mean states have less disposable income to spend on social programs and infrastructure and might have to raise taxes to make up the difference. And propping up a pension fund with taxpayer money can be a political liability that no bureaucrat wants. Fears of political fallout are one reason bureaucrats are loathe to address the issue of unfunded liabilities.
Another cloud over pension funds is due to upticks in private equity investments by public pension funds. These types of investments went from 2.3% in 2001 to 8.7% in 2021 and continue to trend upward. The reason for such a spike is easy to understand when you consider that pension fund managers are pressured to earn between 6.5 and 7.5% annually. That’s nearly impossible to do these dayhs without increasing risk exposure. Desperation to make up lost revenue has also resulted in some state pensions adding riskier, more volatile investments, such as hedge funds and real estate, to their holdings.
What can you do to help protect your public sector pension?
- Add more legs to your “3-legged stool”. Even if you feel your federal or state pension is 100% safe, you should always plan for multiple income streams when you retire. However, unlike workers in the private sector, not every public employee is covered by Social Security. Some have only their public pensions, while others only get Social Security. Some public employees get both their government retirement and some Social Security. Depending on your unique situation, you may want to add assets to your portfolio to complement your pension, Social Security, and savings.
- Look for “lost” money. An incredible 80,000 workers, many of them now working for state, local, or federal governments, have unclaimed private pensions. Be sure you notify anyone you worked for previously of your new address, phone number, or other critical contract information. Finding a “lost” pension is like finding money you didn’t know you had, and you don’t want to lose what’s yours.
- Stay organized and keep accurate records. It’s wise to avoid throwing away anything related to your current or previous pension plans and to make digital copies of paper records. As a public sector employee, you want to keep all documents related to your pension, Social Security information, W-2 forms, benefit statements, disclosures, Summary Plan Descriptions, and other pertinent correspondence. That way, if there’s a mistake in calculating your service time or other critical data, you’ll have records to prove your point. If your previous employer loses previous records, you can provide backup.
- Check your benefits often. Government employees, perhaps even more than private employees, must stay on top of their benefits. FERS and CSRS employees should check out the Office of Personnel Management’s website (https://www.opm.gov/) to help them thoroughly understand their benefits. The OPM site also has several valuable calculators you can use to stay on track and links to help you change or update personal information.
- Partner with a financial advisor who specializes in public sector benefits. Federal and state employee benefits can be complicated and contain language that is frustrating to decipher. Not every financial professional is up to the task of helping government employees navigate the benefits maze.
Summing it up:
As the worldwide recession deepens, public pension plans will likely under-perform. And many situations outside the economy could threaten your program, including underfunding, mis-management, and human error.
Fortunately, while there’s no guarantee that your pension plan will deliver as promised, you shouldn’t give up on safeguarding the money you’re owed. You can take steps to do that, and qualified federal benefits advisors can help you do so. Contact me if you’d like a comprehensive, no-cost review of your federal or state benefit plan. I know the ins and outs of government pensions and would love to help you protect what you’ve worked so hard to get.
Brian Swerdlow
Anchor Financial Advisors
+1 (847) 604-0090
Federalemployeeadvocates.com/
brian@anchorfinadv.com
