U.S. Facing Pension Crisis

Millions of American workers are facing a stark reality; pension promises have been made that are not likely to be kept.

The U.S. is presently facing a pension-funding crisis. It’s estimated that only about 30-40% of pension plans are now fully funded, which means that many people will not get the retirement funds that they've been planning on and will find themselves cut short in their senior years. Most have no backup plan.

The Pew Center on the States, a nonpartisan research group, estimates that states are at least $1 trillion short of what it will take to keep their retirement promises to public workers.

However, that estimate was based on fiscal 2008 data; we are now in fiscal 2012.

Last year, two Chicago-area professors calculated the shortfall at $3 trillion. They weren't alone in their dire calculations.

A report from the National Center for Policy Analysis concurs. It also indicates that state and local pension funds are drastically underfunded to the tune of $3 trillion. That's simply stunning, and it's a horrible omen of what's to come.

The private sector has been eliminating defined-benefit pensions, sometimes in favor of 401(k) programs. But the private sector is also grappling with underfunded or collapsing pension programs.

A 2009 study found that America's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008. Given the state of the economy over the last three years, it's tough to imagine the situation has improved much, if at all.

And the Pension Benefit Guaranty Corporation says that the number of pensions at risk inside failing companies more than tripled during the recession.

As of 2008, just four states had fully funded pension programs. As a result, there are massive problems on the horizon.

The Illinois pension system, for instance, is at least 50 percent underfunded. Some analysts warn that this could push the state into insolvency if the economy doesn't pick up. The problem, according to Fitch Ratings, is that Illinois cannot grow its way out of the problem.

Illinois reports that it has $62.4 billion in unfunded pension liabilities. However, many experts place that liability tens of billions of dollars higher.

California's pension problems are simply breath-taking. The Golden State has an estimated $500 billion in unfunded pension obligations. That's a figure that could cripple the state for many years to come. Unless the state defaults, those are legal obligations that California must somehow pay. No one knows how that will happen.

In fact, under the law, all state and local pensions are non-negotiable. They are mandatory and will be funded at the expense of higher taxes or reduced services, such as healthcare, roads, or police and fire departments. By law, pension funding in some states will consume 25-30%, or more, of tax revenues.

However, if older pensions cannot be fixed, many legislators are determined to fix future pensions.

An initiative circulating for California's 2012 state ballot seeks to increase the minimum retirement age to 65 for public employees and teachers, and to 58 for sworn public safety officers.

Americans are increasingly living well into their 80s. Yet, many recipients of public pensions are retiring at ages ranging from 55 to 60. Police and firefighters often can retire starting even younger — at around age 50 — because of the physically demanding nature of some of those jobs.

Over the past two decades, eligible retirement ages have fallen for a variety of reasons, including contract agreements between states and government labor unions that lowered retirement ages in lieu of raising pay.

Three-quarters of U.S. public retirement systems in 2008 offered some kind of early-retirement option paying partial benefits, according to a 2009 Wisconsin Legislative Council study. Most commonly, the minimum age for those programs was 55, but 15 percent allowed government workers to retire even earlier, the review found. The study is widely regarded as the most comprehensive assessment of the issue.

Pension obligations may be the proverbial hump that breaks the camel's back. The states face huge battles with public employee unions and some may attempt to follow the lead of Indiana, which decertified its public employee unions.

How all of this plays out in courts across the nation will be both fascinating and impacting. Some very ugly fights will ensue. But for the states, those fights are worth engaging. There is no other choice; they can't get money from nothing.