Struggling Municipalities, Take Notice of New York’s Pension Fund

Source: Thinkstock

Source: Thinkstock

The days of well-funded pension funds seem to be dying. Successful corporations are suffering pension issues. Many public municipalities are struggling to make ends meet on the pension front. It is an epidemic of global proportions. Global retirement crisis is bearing down on workers of all ages, in fact. While the financial meltdown in 2008 and the Great Recession of 2009 triggered much of the realization of the difficulty of pension system sustainability, the problems had been brewing for years.

Now, many people will be forced to work well past the traditional retirement age of 65. Living standards will fall and poverty rates will probably rise for the elderly in wealthy countries that built safety nets for seniors after World War II. In developing countries, people’s rising expectations will be frustrated if governments can’t afford retirement systems to replace the tradition of children caring for aging parents.

An Emerging Crisis

The emerging crisis is a convergence of three factors. First, countries are slashing retirement benefits and raising the age to start collecting them. These countries are awash in debt since the recession hit, and they face a demographics disaster as retirees live longer and falling birth rates mean there will be fewer workers to support them. Second, companies have eliminated traditional pension plans that guaranteed employees a monthly check in retirement. Third, individuals spent freely and failed to save before the recession and saw much of their wealth disappear once it hit. Those factors have been documented individually. What is less appreciated is their combined ferocity and global scope.

Source: Thinkstock

Source: Thinkstock

Impact of the Great Recession

The outlook worsened once the global banking system went into a panic in 2008 and tipped the world into the worst recession since the 1930s. Government budget deficits swelled in Europe and the United States. Tax revenue shrank, and governments pumped money into rescuing their banks and financing unemployment benefits. All that escalated pressure on governments to reduce spending on pensions. The Great Recession threw tens of millions out of work worldwide. For others, pay stagnated, making it harder to save. Since government retirement benefits are based on lifetime earnings, they’ll now be lower. The Urban Institute, a Washington think-tank, estimates that lost wages and pay raises will shrink the typical American worker’s income at age 70 by 4 percent — an average of $2,300 a year. The National Institute on Retirement Security estimates that Americans are at least $6.8 trillion short of what they need to have saved for a comfortable retirement. For those 55 to 64, the shortfall comes to $113,000 per household.

New York State Well in the Green

As a New York State (NYS) native and member of the retirement system, I learned recently that the value of New York State’s pension assets climbed to a record $176.2 billion in fiscal 2014. This was according to the annual report given by NYS Comptroller Thomas DiNapoli. The New York State Common Retirement Fund, which provides benefits to more than 1 million state and local government workers, retirees and their beneficiaries, returned an estimated 13 percent in the fiscal year that ended March 31, according to the Comptroller, who stated that, “It was a stellar year for us. The financial markets have given investors a wild ride the last few years, but our investment strategy has allowed us to capitalize on opportunities and minimize risks.”

Domestic stocks returned 22.3 percent while private equity rose 17.5 percent and real estate almost 19 percent, DiNapoli said. The pension has 37.7 percent of its money invested in U.S. stocks, 7.9 percent in private equity, and 6.9 percent in real estate. The fund — the third biggest in the U.S. — had about 90 percent of the cash needed to meet its obligations as of 2012, which made it the sixth best funded state plan, according to data compiled by Bloomberg, and it’s rapidly climbing. Based on its current trajectory, it could take the top spot in less than a decade.

Source: Thinkstock

Source: Thinkstock

Rebounding stock prices and a slow rise in housing prices are helping households recover their net worth. In the United States, retirement accounts hit a record $12.5 trillion the first three months of 2013. But Boston College’s Center for Retirement Research says the recovery in housing and stock prices still leaves about 50 percent of American households at risk of being unable to maintain their standard of living in retirement. When they look into the future, retirement experts see more changes in government pensions and longer careers than many workers had expected. Cuts in government pension programs like Social Security will likely hit most retirees but will probably fall hardest on the wealthy. Those planning to work past 65 can take some comfort knowing they’ll be healthier, overall, than older workers in years past. They’ll also be doing jobs that aren’t as physically demanding. In addition, life expectancy at 65 now stretches well into the 80s for people in the 34 OECD countries — an increase of about five years since the late 1950s.


The model of the pension is probably ceasing. Even in NYS, new retirement tiers for public employees have been instituted, which require employees to pay larger percentages of their pay for longer periods of time. Despite this, NYS is a model for a healthy pension system. While the crisis in stocks of 2009 crushed the values of many systems globally, other corporations and public municipalities have been operating at extreme deficits and are completely broke. They could stand to take a lesson from NYS in this regard.

Disclosure: Christopher F. Davis is a member of the NYS retirement system.

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