Since Britain’s stunning vote to leave the European Union, U.S. markets have already plummeted and markets around the world are in mayhem. Economists warn that the vote will continue to have adverse consequences on financial institutions and markets around the globe, including the U.S., for an unforeseen amount of time.
So what does that mean for public pensions?
Most American public employee retirement systems are heavily invested in stocks because they are counting on high investment returns to cover huge gaps in funding, which were created by decades of over-promising benefits and underfunding annual contributions.
As a result, public employee retirement systems have become unsustainable and the problems have been compounded by continually increasing benefits based on unrealistic and risky market expectations. So when the stock market turns negative, as inevitably it will, pensioners will run the risk of losing their retirements or taxpayers will be left picking up the shortfall. High risk investment practices are particularly dangerous in periods of market volatility because of the potential for big losses that cannot be recovered before the next recession.
If pension systems were set up with less risk (as they once were), more sharing of that risk and lower return expectations, then the real cost of retirement benefits would be more apparent to everyone and retirees could count on being paid what they have earned.
Today’s state and local public employee pension system is already in crisis with more than $1 trillion in unfunded liabilities. Brexit should be the wake-up call drastically needed for policymakers to turn the tide and make the systems sustainable. If they don’t get control of the public pension crisis now, events like a Brexit mean more and more plans will get further and further behind on their funding obligations. And the consequences for taxpayers and retirees are dire, as we have seen in Detroit and Puerto Rico.
About the Author: Charles Rufus “Chuck” Reed is an American politician and lawyer. Chuck Reed served as the 64th Mayor of San Jose, Calif., from 2007 to 2014. During his tenure as mayor of America’s 10th largest city, he introduced and passed more than 80 fiscal and open government reforms, including a comprehensive pension reform bill that was approved by the voters in 2012. Chuck’s work on pension reform has paved the way for many other cities to tackle their own fiscal retirement planning.