PENSION PARADOX IN U.S. STATES. STATES ARE IN A “DEATH SPIRAL”
U.S. state pensions such as Illinois, Kansas and New Jersey are in a “death spiral,” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains.
Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.
Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.
“Once you get into that dynamic, you’re in a death spiral,” said Michael Aronstein, who manages the $295 million Marketfield Fund of stocks as chief investment strategist at Oscar Gruss & Son, a New York brokerage. “There’s no financial or return solution.”