While relatively few countries’ pension funds have escaped unscathed from the current financial crisis the US seems to have taken the biggest hit over the last couple of years.
It’s not a huge surprise, given that pension plans in the US make up more than 60% of global pension assets. The ongoing financial crisis has left corporate pension funds hugely underfunded and many workers are seriously reconsidering their retirement plans, some more drastically than others. A number of people have already stopped paying in to their IRS pension plans, while a not insignificant minority have completely shelved their retirement plans and are exploring other options. Those who have opted out entirely have had to rethink not only their lifestyle after retirement but their retirement age as well.
Making matters worse is the job market, with high unemployment levels plunging thousands of people in to deeper financial difficulty and slowly eroding any security they might have built up over the years.
Many private companies have attempted to offset some of the financial strain by reducing their contributions to pension funds, with some of the most severely affected completely abolishing schemes. Sadly this looks like a trend which is set to continue for the foreseeable future.
California is a typical example of how states are being affected. The largest public pension fund in the country, the California Public Employees Retirement System (CalPERS), has reduced its forecast for investment returns for the first time in 10 years. They have also requested that local school districts and local government increase their contributions, a move that could have a significant impact on the standard of services offered to residents in a time where cost cutting is already a top priority.
This means that around 4% of the state’s annual budget is allocated to CalPERS, at a time when almost every department is looking to make budget cuts wherever they can. Public sector pensions have already come under fire due to the substantial benefits they offer over those provided to those in the private sector. Many taxpayers are starting to question the feasibility of the public pension fund given the current state of the economy.
The state budget deficit stands at around $9.2bn and reductions to public sector pension benefits have already been proposed by Governor Jerry Brown, alongside increased contributions from workers and an increase in the state retirement age. The proposals, which have yet to be implemented, also support a plan for new employees to participate in a hybrid plan in which a 401(k) style system would be used to make the pension schemes more comparable to those in the private sector.
It highlights the significant steps governments have to take to deal with this huge issue, which will have an impact on millions over the next couple of decades.
Stuart produces content on behalf of cbonline.co.uk and contributes to a number of financial blogs