Economic Downturn and Stock Market Losses Continue to Impact Public Pensions

Just like many other parts of the economy, the stock market took a heavy hit due to the pandemic. At their lowest points of the crisis, both the Dow Jones and the FTSE 100 were down over 30%. Five months later, they each sit down 13.3% and 19.3% respectively. 

With the stock market crashing in mid-to-late March, pension fund returns have shrunk. Moody’s Investors Service estimates that returns for many pension funds this year will reach only 1%, instead of the widely targeted 7% return rate. Roughly $1 trillion of value has been lost by public pension funds stemming from the poor market performance.

Investment returns are vital to pensions because employee and government contributions aren’t enough to support the scheduled payouts to retirees. This likely means that unfunded liabilities are going to increase. To cover for this increasing gap, funds will call on employees to contribute more. This will prove to be more tricky considering that unemployment is in poor shape as well, creating a smaller pool of contributors to pension funds across the nation.  In 2007, federal and local government pension debt totaled about $1.6 trillion according to the Federal Reserve, or roughly 11% of US GDP. In 2019, unfunded liabilities reached $4.1 trillion, about 19% of the GDP. 

Unfunded liabilities have more than doubled since the crash of 2008, with the COVID-19 pandemic greatly exacerbating the issue. Because of the handling of the pandemic to this point, many health experts predict that COVID-19 will be prevalent for many months to come. This, in turn, means a prolonged economic downturn, longer than originally anticipated. As reported before on the IPFI blog, remedies to these pension shortfalls will likely be brought up by elected officials in DC and elsewhere in the coming months. With the second stimulus bill stalling in Congress, it seems like the American economy, and people, will be faced with a tough road ahead.