The Next Retirement Crisis: America's Public Pensions

(Editor’s Note: This story is part of a partnership between Next Avenue and Chasing the Dream, a public media initiative on poverty and opportunity.)

Back in 2013, I blogged on Next Avenue about the excellent PBS FRONTLINE documentary, The Retirement Gamble, where correspondent Martin Smith reported on America’s troubling retirement savings crisis. He’s now back with a riveting sequel which aired Tuesday, Oct. 23 and is now available for watching online, The Pension Gamble, on a growing, troubling, retirement concern: America’s underfunded public pensions. It’s worth watching.

You may be saying to yourself: I’m not a teacher, police officer, firefighter or municipal worker, so why should I care whether public-employee pension plans are underfunded. Here’s what Smith told me: “About half the states have pensions that are 70 percent funded or much worse. The states can’t borrow or sell bonds to China.” So, Smith adds, in four or five years, some of those states will likely have to either cut their services (the equivalent of a state bailout) or they will need a federal bailout.

And a federal bailout “is more of a problem for everybody,” Smith notes. “That’s why we all should care.”

You might also care because of all the unfulfilled promises made to public employees around the country. As Smith explains in his program, many public servants accepted their jobs and the less-than-fabulous salaries that came with them partly because they knew they could count on decent pensions with regular, guaranteed income in retirement. Now they fear that safety net has seriously frayed and their retirement may be in jeopardy.

The Pension Gamble focuses on Kentucky’s severely underfunded pension plan, Kentucky Retirement Systems (or KRS), one of the most problematic state plans in the country, with a shortfall of an estimated $36 billion. Its pension fund managers rolled the dice with hedge fund money managers who allegedly charged exorbitant fees (often without disclosing them) and whose investment performance disappointed.

A class-action lawyer suing KRS says on The Pension Gamble: “Kentucky may be the first to go down, but it won’t be the last.”

The personal toll is poignant. One Kentucky police officer tells Smith during the program: “The pension benefit was a big deal. I knew that after twenty years of a career, my wife and I would have health insurance and I would have some kind of pension.” Now he's not so sure.

A substantial, guaranteed pension is also what most private-sector workers used to expect, too, before companies dumped their “defined benefit” pension plans (funded by the employers and with fixed monthly retirement benefits), replacing them with 401(k) “defined contribution” plans (funded by employees, sometimes with employer matches, but with unpredictable retirement payouts).

So what happened in the public pension world? To offer an example, Smith paints a bleak tale in Kentucky, filled with KRS’ rogue Wall Street money managers, inexperienced — if not incompetent — local pension fund managers and unwitting state employees. Some 20 years ago, Smith reports, it looked like KRS would never have a problem. Then, as the show explains through terrific interviews and analysis …

• It lost $1. 2 billion in dot-com bubble investments that popped
• Kentucky’s governors raided the pension fund money, diverting some of its cash because they were reluctant to raise taxes
• The pension funds lost $2.8 billion in the 2008-’09 stock market crash
• The fund managers put some money in exotic, risky investments like hedge funds and paid middlemen $14 million in fees for the privilege (one of the funds failed and closed)
• At one point, only one member of the KRS board had investment management experience

While the stock market run-up in recent years may stem some of the hemorrhaging for public-employee pension funds, it won’t be enough to staunch the red ink.

“It’s like having a mortgage where you don’t pay the bills for ten years fully and now you’re way behind and you start to pay a little,” says Smith. “It takes a while to catch up.”

In recent years, Smith reports, Kentucky lawmakers decided to make drastic changes to the public pension system. A 2013 bill impacted public employees other than teachers. A second bill, which would affect public school teachers, said future public employees would no longer get a defined-benefit pension plan; instead, they’d get a hybrid “cash balance” plan, similar to a 401(k), but slightly better.

Despite an outcry from state workers and from Democrats in the legislature who weren’t even allowed to read that second bill, the proposal passed earlier this year. But the Kentucky Attorney General blocked it in court, where things are now on hold.

As for the future? “I don’t want to think about it,” a Kentucky teacher says on the PBS FRONTLINE program. “I have no savings. My pension is everything. Without that, I won’t survive.”

This story is part of our partnership with Chasing the Dream, a public media initiative on poverty and opportunity. Major funding is provided by The JPB Foundation.

Richard Eisenberg is the former Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and former Managing Editor for the site. He is the author of "How to Avoid a Mid-Life Financial Crisis" and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Read More