How bad is an underfunded pension? - Printable Version

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How bad is an underfunded pension? - The Beast1 - 07-17-2014

I was looking at a list of state teacher pensions and it appears my home state of Illinois is only partially funded.

I figured it would be lower, but surprisingly that is not that bad.

How much of an issue is that?

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How bad is an underfunded pension? - Dragonstone - 07-17-2014

As I understand it from talking to individuals in the field over several years, and I'm probably missing details...the warning light is on "yellow".

If they are using the measurement that I usually read, it means that current assets can only meet the present value of 75 percent of future projected liabilities (AKA Benefits). To pay out all projected future benefits without depleting the plan's assets, they need to get more assets, usually by having an increase in employer or employee contributions, decrease future benefits, or get very good returns on current assets.

The first case causes financial pain today, the second causes political pain today, and the third is increasingly unlikely.

That said, many government pension plans are backed to some extent by their state-level government, and some are backed by the US Government's "Pension Benefit Guaranty Corporation" (PBGC), which is a whole other matter.

Edited for spelling.

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How bad is an underfunded pension? - DVY - 07-17-2014

Depends on how they discount the pension's funds returns. I'd be wary if the pension fund had a 4% discount rate, but reasonable if it had a 8% discount rate.

This is especially true if most people won't retire for another 10 years.

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