Government employers have made promises to public workers, that at retirement they will get guaranteed monthly income for life. But how do pension plans keep these promises? It all starts with one of the most important measurements a pension plan has: funded status.
Funded status measures the dollars a pension fund has received and invested, compared to the pension payments it needs to make.
Challenges with Funded Status
In recent years, funded status has been less-than-perfect for most public pension funds, due to growing pressures that pension boards and legislatures have been slow to react to:
- People are living longer, which means paying benefits longer than your pension board may have originally expected.
- Governments have failed to pay all of their pension bills on time.
- Investments made by your pension board haven’t performed as well as they predicted.
The result is a significant shortfall funded status. Government employers have to make up any shortfall in your pension fund’s assets, making debt payments.
In many states, the pension debt is billions of dollars. It’s getting harder to keep up — and you may be feeling it yourself. If you’re a public worker, your take-home pay might be getting smaller because you’re required to contribute more from each paycheck. Or raises might not feel as meaningful because your state has less money to increase pay. If you’re already retired and receiving a pension, you may be losing your COLA — or cost-of-living-adjustments — which helps you keep pace with rising prices.
Taxpayers may be feeling the decline in funded status too, just in ways not recognized. Property taxes might be up, road repairs might be delayed, or public investments in things like affordable housing or cleaner parks might be on hold.
This article is part of Equable’s Pension Basics series. To learn more about how your pension works, check out the other articles in the series:
5. Normal Cost