Markets rebounded somewhat in July, but remain below their all-time highs of last year. The S&P 500 fell more than 20% in the first half of 2022, its worst performance since the Nixon era in 1970. The Dow suffered losses of 15% between January and June, while the Nasdaq did the worst of all and is at 30%.
In other words, don’t check your 401(k) statement.
But the situation is particularly dire for government pension plans. “U.S. public pension funds are on the cusp of their worst financial setback since the Great Recession,” reports Bloomberg News, “as turmoil in global markets this year threatens to leave taxpayers and public officials on the hook. “.
The market sell-off wiped out much of last year’s gains and could lead to higher taxes and higher payroll taxes for civil servants. Funds have also started taking on riskier investments to stem losses, The Wall Street Journal reported last month.
The national public pension funding gap is now $1.4 trillion, according to the Equitable Institute, up from $933 billion at the end of 2021, when market gains were fast and furious. It’s a cycle that’s been repeating itself for decades.
But while many public pension funds have made progress in recent years in tackling unfunded liabilities, the market malaise again reveals a structural problem.
For years, Democratic politicians have expanded benefits to curry favor with public sector unions that contribute to their campaigns. State systems — including in Nevada — are setting performance targets that are too optimistic to hide their liabilities. Eligibility requirements for these schemes are often much more generous than in the private sector, with some civil servants able to retire after 30 years of service with almost full salary for life.
In the face of skyrocketing long-term liabilities, many states have implemented common-sense benefits reforms for new hires and increased worker contribution rates. That, combined with robust markets over the past decade, has made the problem more manageable. But the risks for the private sector workers who have to fund these programs – while not benefiting from such largesse from taxpayers – remain real, especially as managers fight the recession by turning to riskier investments and borrowing money to meet their obligations.
Nevada’s public employee retirement system generated a return of 27.3% for the fiscal year ending June 2021. Yet it remains only 75% funded and has unfunded liabilities of more than $9 billion. – $18 billion if more realistic return assumptions are imposed. Nevada lawmakers have tinkered on the sidelines over the decades, but more needs to be done. Moving new employees from a defined benefit plan to a defined contribution plan would be a good start.