Under funding of retiree pensions is surfacing all across the country. Chicago and Illinois are particularly vulnerable to defaulting on their pension promises.
The latest pension fund struggling with finding a path forward is the Central States Pension Fund(Central States Pension). They are looking at 50%+ cuts in pension checks.
There are two major reasons pension funds are underfunded: First, they assume unrealistic investment returns of 7%-9%; Second, they assume the number of workers paying into the fund will continue to grow faster than the number of retirees receiving benefits.
The Central States Pension has 400,000 participants with 220,000 retirees. In other words, 180,000 people are paying in to the fund so that 220,000 people can receive benefits. The fund is projected to run out of money in 10 years at the current rate!
Some analysts compare pension funds to "Ponzi" schemes in that in the beginning many people contribute and few receive payments, however, as the participants age, fewer people are contributing to the fund than those receiving benefits. It is simple math to determine that such a scheme will ultimately run out of money.
Georgetown participates in the Texas Municipal Retirement System(TMRS) and the number of participants will likely continue to increase as long as the population of Texas continues to increase. However, in their latest official publication, TMRS assumes a 7% investment return, which in today's environment of the Federal Reserve's suppressed interest rates, is completely unrealistic. With a more realistic investment rate assumption, Georgetown will find that TMRS is underfunded and increased funds from tax receipts will have to be allocated for pension contributions.
The City needs to be aware of what is happening in the pension fund universe and develop a strategy to cope with the coming issues.
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