In the 11-year period of market growth following the 2008-09 financial crisis, pension programs remained severely underfunded. Now that the market is on the cusp of new volatility stemming from inflation and other factors, the situation has grown worse according to a report from CNN.
“The 100 largest public pension funds in the United States had been funded at just 78.6% of their total obligations at the close of the second quarter, down from 85.5% at the end of 2021 according to analysis by Milliman, an actuarial and consulting firm,” the report reads. “The funds lost a whopping $220 billion between March and April alone as Russia’s invasion of Ukraine roiled markets.”
Public pension funds have turned to borrowing larger sums to keep up with existing obligations, and nearly $13 billion in pension obligation bonds were sold in 2021 accounting for more than the past five years combined.
“The California Public Employees’ Retirement System (CalPERS), which manages the largest public pension fund in the United States, with about $440 billion in assets under management, began leveraging some of its debt this month,” the report reads.
The Teacher Retirement System of Texas has used leverage funds since 2019, which can help multiply market gains in times where the volatility is low.
“While the majority of pensions still don’t use borrowed funds, there has been a sharp increase over the last four years. Before 2018, none of the largest funds used leverage,” the report says. “At the same time, funds began taking on riskier assets during the bull run and low-interest environment to make up for some insolvency.”
Rather than raise costs or fees to compensate, pension funds have instead been raising target annual growth rates and have been making riskier investments, the report says.
“Analysts say pension funds are now operating more like hedge funds and treading on risky footing. It’s also typically the funds in the most financial trouble that take on these trades,” it explains.
While Social Security is largely the most prevalent form of retirement funding in the U.S., pensions still account for many seniors’ retirement funding sources. Such seniors may qualify for a reverse mortgage.
Read the report at CNN.