A Pension Hole the Size of Japan’s Economy

                The title of the article in the Wall Street Journal a few weeks ago was intended to turn heads.  (See https://www.wsj.com/articles/the-pension-hole-for-u-s-cities-and-states-is-the-size-of-japans-economy-1532972501?mod=hp_lead_pos7) There has been an increasing amount of coverage in the media about the pension crisis in the country, specifically the underfunding of public employee pensions.  According to the WSJ article public employee pension plans are underfunded by an estimated $5 trillion, an amount equal to the size of Japan’s economy.

                We know here in New Jersey we have a growing problem.  According to some estimates our government pension system could run out of money in 12 years.  The legislature and governor have talked about fixing it but there isn’t any easy solution and so far no real measures have been taken.

                What will happen if there isn’t enough money to meet all pension obligations?  Will pensions be cut?  Can they be?  In some states that has already happened or is being tried.  The city of Central Falls, Rhode Island filed for bankruptcy in 2011.  The city’s police and firefighters agreed to pension cuts of 55% because they were fearful that they could lose more benefits if they didn’t.  The city is doing somewhat better fiscally now, but the cuts are not likely to be restored.

                In Puerto Rico which filed for bankruptcy last year, officials have suggested a 10% cut in retiree pensions but the governor hasn’t agreed to it yet.  A Kentucky judge ruled that a law reducing new worker benefits was unconstitutional because of the way it was passed.  Corrections by legislators could certainly lead to another attempt.  California now has several lawsuits before its Supreme Court challenging a 1955 rule that says public employee benefits can’t be cut.

                The pension problem isn’t going to solve itself so we can expect the probability of more cuts in the coming years.  But are all pension recipients or current government workers likely to be affected?  Is there anything present and future pension recipients can do to protect themselves?  We’ll address that next week.