How’s your 401(k) doing? If you have stocks in it, not well.
How are government pensioners doing? Fabulously well, some of them. A database of pensions maintained by the Empire Center for Public Policy, a fiscal watchdog in Albany, shows firefighters retiring on up to $284,000 a year.
How are taxpayers faring? Badly. A survey published Jan. 15 by Moody’s says that state pension funds are $1.3 trillion underwater, a number up slightly from the year before. The bond raters don’t have a complete picture of municipal pensions, but they do have a 2013 total for 50 large cities: $435 billion missing from the till.
The scary thing about the Moody’s state report is that its numbers are for the 2014 fiscal year, meaning a valuation date of June 30, 2014 for most states. Over the preceding 12 months, pension portfolios averaged a 16% return. You’d expect that with such gains the deficit would shrink. It didn’t. Rising obligations swamped that bull market.
We don’t know how big the pension hole is today, but it stands to reason, given how stocks and bonds are going sideways, that it is deeper. Since June 30, 2014, the blend of stocks and bonds in the Vanguard Balanced Index Fund has returned a cumulative -0.4%.
Which state is in the worst shape? Depends on how you measure. Illinois, Alaska and New Jersey can all lay claim to the honor.
By dollar total, Illinois is at the top, with a deficit of $195 billion. Meaning: It has that much less in the bank today than it should have to cover benefits already earned. It’s noteworthy that Illinois managed to worsen its deficit during a period when investment returns were abnormally high. The year-earlier figure was $18 billion smaller.
New York is for the moment awash in tax revenues from the financial sector, and has done a good job of funding its pension promises. (New York City taxpayers put in $8.8 billion a year for city plans.) Alaska used to be awash in tax revenues from $100 oil.
Moody’s singled out New Jersey for special mention. The credit analysts compared what a state is adding to the pension pot to the amount it should be adding in order to eventually catch up. Most of the states are chipping in at least 90% of what’s due annually. New Jersey is paying only 19%.
Moody’s deficits are much grimmer than those confessed to by the states. The main reason, explains Moody’s analyst Timothy Blake, is a difference in how to discount future pension benefits. A high discount rate assigns a small value to a pension check to be cut in 2028.
For most states Moody’s used 4.3%, a rate keyed to the yield on Aa-rated corporate bonds. States have rather more lavish expectations for what they are going to earn on Wall Street. Most of them are counting on an annual return between 7% and 8%.
The Moody’s approach is in fact a compromise between the wishful thinking of states and the strict approach favored by some academics, in which state pension debts are discounted at low U.S. Treasury rates.
So, how are you doing compared to that top-earning firefighter? This requires some arithmetic, since he’s got a guaranteed monthly pension and you may have just a 401(k).
Here’s what to do. First, if you have a monthly pension coming to you, insert the amount into the calculator I have provided in Maximize Your Pension With This Calculator. That shows the present value of your monthly income stream.
Add to this the balance in your 401(k). The sum is the value of your retirement earned so far.
Now use the same calculator to calculate the present value of the state and municipal pensions tabulated at the Empire Center’s See Through NY. We can only guess about ages and survivorship rights, but it seems that at the top of the list the values are in the neighborhood of $5 million.
New York City employees contribute to their pensions, so they are to some extent getting their own money back. You probably have the same relationship with your 401(k).