The main challenge facing the public pension industry is the high assumed rates of returns on pension assets relative to what equities or bonds are likely to deliver.Many US public pension funds expect a rate of return in the neighborhood of 7% per year. But in today’s capital-market environment, achieving that sustainably over the long term has become an increasingly daunting task.
In fact, this is not a new problem. As Chart 1 illustrates, the gap between the risk-free and assumed rate of return has been widening for the past four decades. In the1980s, the risk-free rate (as approximated by the yield for ten-year US Treasury bonds) was often far higher than the assumed rate of return, making it relatively easy for pension funds to hit their targets. Today, however, the risk-free rate is more than six percentage points below targeted return.
With a perfect storm of aging residents, low birth rates, COVID-19 deaths and immigration cutbacks, 16 states saw population decreases last year as the United States experienced the slowest national population growth since the Great Depression.
The nation grew only about 7% between 2010 and 2020, similar to the previous historic low between 1930 and 1940, according to new Census Bureau estimates, which do not reflect the 2020 census counts. The agency will release the final 2020 census tally in March.
A federal judge ordered Harvey, Illinois, to rehire a consultant and prove the status of management reforms the city agreed to in a 2014 consent judgment that settled charges the Chicago suburb fraudulently used bond proceeds.
After a series of communications over the last year about the status of the impoverished city’s compliance, the Securities and Exchange Commission dragged the city back to court in October.
Two of the five pension funds in the New York City Retirement Systems will divest an estimated $4 billion in securities related to fossil fuel companies, city officials said Monday.
The Biden administration will review a recent Department of Labor rule stipulating that ERISA plan fiduciaries cannot invest in “non-pecuniary” vehicles that sacrifice investment returns or take on additional risk.
The Maryland/West Virginia gap is one of many such anomalies across the country. Why has North Dakota managed to use 85% of the doses it has received for inoculations compared to 49% for Massachusetts? Why does New Mexico have an inoculations/doses received ratio of 77%, versus just 43% for Virginia? What differences of institutions, strategies, and leadership explain these gaps?
Workers have the option of claiming Social Security retirement benefits at any age between 62 and 70, with later claiming resulting in higher monthly benefits. These higher monthly benefits reflect an actuarial adjustment designed to keep lifetime benefits equal, for an individual with average life expectancy, regardless of when benefits are claimed. The actuarial adjustments, however, are decades old. Since then, interest rates have declined; life expectancy has increased; and longevity improvements have been much greater for high earners than low earners. This paper explores how changes in longevity and interest rates have affected the fairness of the actuarial adjustment over time and how the disparity in life expectancy affects the equity across the income distribution. It also looks at the impact of these developments on the costs of the program and the progressivity of benefits.
The paper found that:
The increases in life expectancy and the decline in interest rates argue for smaller reductions for early claiming and a smaller delayed retirement credit for later claiming.
Specifically, the benefit at 62 should equal 77.5 percent, as opposed to 70.0 percent, of the full age-67 benefit, and the benefit at 70 should equal 119.9 percent, instead of 124.0 percent, of the full benefit.
The outdated actuarial adjustments are a modest moneymaker for the program – about $1.9 billion in 2018, with most of the gains coming from those claiming at 62, who are typically lower earners. Surprisingly, the correlations between earnings and life expectancy and between earnings and claiming behavior have only modest implications for both the cost and progressivity of Social Security benefits.
Finally, the cost and distributional effects of earnings-related life expectancy and claiming cannot be addressed through the actuarial adjustments for early and late claiming. They reflect the fact that high earners get their large benefits for a long time and low earners get their more modest benefits for a shorter time.
The policy implications of the findings are:
Increases in life expectancy and the decline in interest rates suggest smaller reductions for early claiming and a smaller delayed retirement credit for later claiming.
Accounting for differential mortality would involve changing benefits, and is not a problem that can be solved by tinkering with the actuarial adjustments.
Truth in Accounting has released its fifth annual Financial State of the Cities report. This comprehensive analysis surveys the fiscal health of the 75 most populated US cities prior to the coronavirus pandemic. The report found that 62 cities did not have enough money to pay all of their bills. Most of the cities were ill-prepared for any crisis, much less one as serious as what we are currently facing. Total debt among the 75 cities amounted to $333.5 billion at the end of the fiscal year 2019, which will only worsen as the cities face varying and unpredictable effects from the global pandemic.
While the COVID-19 pandemic and its economic impact present the most pressing challenges, Democratic control of Congress and the White House could also spur action on issues ranging from climate change to scrutiny of private equity practices.
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Mr. Neal’s first bill introduced in the new 117th Congress addresses the multiemployer pension crisis that he said “has only worsened” in the COVID-19 economic downturn. A similar proposal was introduced by members of the House Education and Labor Committee, whose chairman, Robert C. “Bobby” Scott, D-Va., said the pandemic could cause as many as 180 more multiemployer plans to become insolvent, adding up to 300 plans facing failure. Both leaders are urging that the proposed Emergency Pension Plan Relief Act of 2021 be attached to a COVID-19 relief measure now before Congress.
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Potential legislation is expected to build on the panel’s climate action plan calling for clean energy tax credits and jobs initiatives, investments in water infrastructure and research into land and ocean climate solutions, among other ideas.
