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Moody’s: Public Pension Underfunding Nearly $2 Trillion

Though markets averaged a 7.45% return from 2004-2012, unfunded liability of public pension funds tripled — to just under $2 trillion — over that same period, according to a recent Moody’s report. Along with trying to recover from the recent recession, public entities are simply not providing sufficient funding. 

A senior Moody’s official explained: “Part of the answer is the simple deferral of contributions for budgetary reasons, but the back-loading of costs through asset smoothing and 30 year amortization allowed by GASB suppresses near-term contribution increases, in many cases causing UAALs to rise for years by design.”

Add to the underfunding issue the threat of rocky markets as public funds have moved to riskier asset classes, not to mention the fact that the U.S. population is aging and living longer. According to the ICI, public funds held $5.1 trillion as of Q2 2014, so the underfunding is 40% of assets.

While many plans are moving current and future workers to DC plans — creating opportunities for plan advisors — the current public DB liabilities will continue to put stress on state and local governments, causing a combination of increased taxes and lower services.