By M.D. Kittle | Wisconsin Reporter
MADISON – The combined assets of U.S. state-administered public pension systems are approaching the Gross Domestic Product of the United Kingdom – cost of the Olympics not included.
And potential liabilities of the financially troubled system is nearly that of the GDPs of Russia and Canada combined.
The 222 state-administered defined benefit retirement plans totaled $2.5 trillion in cash and investment holdings in 2011, a 14.6 percent increase from $2.2 trillion in 2010, according to new statistics from the U.S. Census Bureau.
By comparison, the United Kingdom posted $2.417 trillion in nominal gross domestic product in 2011, the sixth largest GDP in the world, depending on measurement. Add at least another $37 billion to the jolly U.K.’s output this year , the cost, Sky Sports estimates, of London hosting the Olympics.
The Wisconsin Retirement System, covering more than a half million former and current employees, boasts about $80 billion in assets.
WRS is regarded by many pension watchers, particularly its administrators, as among the stronger – if not the strongest — public pension system in the country.
A Pew Center on the States Study found Wisconsin in 2010 was the only state with a fully funded public employee retirement system, in a universe of hefty pension debt. The study noted a combined $1.38 trillion in public pension unfunded liabilities nationwide.
Michael Williamson, new executive director of the State of Wisconsin Investment Board, or SWIB, recently told the Wisconsin State Journal that Wisconsin’s pension system requires “shared risk, consistent contributions by state and public employees, and solid investment returns.”
The problem is “solid investment returns” have been hard for retirement systems to come by, including Wisconsin’s vaunted trust funds, in the heat and aftermath of the Great Recession.
WRS investments have fallen well behind expectations.
Preliminary figures show the core investment fund returned just 1.4 percent over the fiscal year ending June 30. WRS assumed its investments would earn 7.2 percent.
Over the same time, the S&P 500 returned 3.14 percent.
Even the fund’s more recent gains — investments earned 5.9 percent in the half year from Jan. 1 to June 30 — wasn’t enough to make up for the first six months of the fiscal year.
Nationally, earnings on investments for state public pensions funds topped $410.6 billion, up from $291.1 billion in 2010, according to the Census.
Falling behind can cost the system billions of dollars, putting pressure on the funds to fill the gap to ensure mandated payouts. Over time, taxpayers could have to make up the difference.
Pension obligations increased 3.7 percent, from $3.3 trillion in 2010 to $3.4 trillion in 2011, according to the Census.
Pension experts argue liabilities measured by state pension funds, Pew, the Census, and others only hit the tip of the iceberg in unfunded liabilities.
Andrew Biggs, economist at the Washington, D.C.-based free market think tank American Enterprise Institute, estimates that real state-administered pension liabilities are in the neighborhood of $4 trillion – as much as $6.5 trillion when adding in local retirement systems.
Biggs and others pension-reform advocates have called for setting returns in line with the market values used by the private sector and governments elsewhere, what Biggs argues is the more realistic corporate bond rate of around 3 percent in valuing liabilities.
Moody’s Investors Service, the global credit rating agency, agrees, recently noting that it is changing how it rates pensions.
“Pension liabilities are widely acknowledged to be understated,” Moody’s managing director Timothy Blake said in a statement. “Our proposed adjustments will improve the comparability and transparency of pension information across governments, enhancing our approach to rating state and local government debt.”
The changes could mean that Wisconsin Retirement System is underfunded by nearly $30 billion – and that could ultimately drag on government bond ratings.
Biggs said Public-sector pensions could be the nation’s next financial bubble, akin to the housing market collapse.
“(Governments) are making the same kind of errors people made regarding housing,” he said. Conventional wisdom in the late 1990s said housing prices would keep rising, even as the experts turned a blind eye to some troubling and untenable investment trends, Biggs said. That wisdom proved faulty — the bubble burst and the world has felt the repercussions in a crippling recession.
The more troubling comparison may be unfunded liability compared to U.S. GDP, at $15.075 billion in 2011.
At market value, the pension funding shortfall represents about a third of U.S. output.
Other news and notes from the Census report:
- Total revenue increased 32.8 percent, to $516.5 billion in 2011. The increase was driven by the rise of earnings on investments, which showed gains of $410.6 billion in 2011.
- Earnings on investments composed 79.5 percent of total revenue, government contributions made up 13.9 percent, and employee contributions accounted for the remaining 6.6 percent of total revenue in 2011.
- Government contributions increased 10.7 percent, from $64.8 billion in 2010 to $71.7 billion in 2011. Employee contributions increased 3.0 percent, from $33.2 billion in 2010 to $34.2 billion in 2011. Wisconsin’s Act 10 requires most public employees to contribute to their pensions.
Contact M.D. Kittle @wisconsinreporter.com
- WI: U.S. Pension holdings rival richest nations’ GDP