The trade publication Pensions and Investments reports that the 100 largest public pension funds lost $146 billion (5 percent) in the third quarter of 2015. Although we don't have the final year-end data yet for the plans yet, international and domestic stock markets closed 2015 essentially flat on the year. What does this mean for pensions? Three things:
- Unfunded liabilities will rise. Pension plans depend on hitting their investment assumptions. To calculate how much they need to save today in order to pay benefits in the future, pension plans must make a number of assumptions, including how fast their money will grow over time. If a pension plan assumes the market will rise 8 percent, anything below 8 percent is essentially a loss and will add to the plan's liabilities.
- Pension plans have yet to fully recover from the last recession. We're in the midst of one of the longest and strongest bull markets in modern history. And while the S&P 500 has tripled from its March 2009 lows, pension funds have barely started to recover. Part of that is due to states prudently lowering their investment assumptions--which increases the amount they must pay in the present--but state and local workers should be worried that their pension plans won't be prepared for the next recession.
- States may face more pressure on benefits. As pension liabilities rise, states become more and more likely to cut benefits, especially for new workers. Another market crash could set off another round of benefit cuts. That would not be good for teachers or other public-sector workers. Instead, we hope states tackle two problems at once and simultaneously address rising costs and inequitable benefit structures. If states do one but not the other, the cycle may be doomed to repeat itself.