Pension Plans And The Detroit Bankruptcy
The Centre for Retirement Research (CRR) report found that in the United States, the States pensions for its employees are 27% underfunded. The total amount of obligations that are underfunded amount to about one trillion dollars. To calculate the one trillion dollar shortfall, CRR used the mathematics used by most States wherein the State uses an annual discount rate of 7.5% to 8%. The discount rate is an assumption that the pension plan monies that are invested will receive a rate of return of approximately the amount of the discount rate. These additional revenues through investment of pension fund monies means that the State, or more appropriately its taxpayers, will not be asked to fund the shortfall.
The problem with the discount rate is it is unrealistic. CCR states that based upon a more realistic discount rate of 5%, the shortfall should be about 2.7 trillion dollars and the pension programs are about 52% underfunded.
New York City has more retired than working officers and police pensions consume more money than police wages. In the State of California, there are more than 20,000 state and local government retirees that receive more than 100,000 dollars per year, and some with pensions exceeding 250,000 dollars per year. Spiking and double dipping schemes by governmental employees have further increased pension debt.
While the average pension in California is about $29,000 per year and the average Detroit pension is about $19,000 per year, most private employees could never expect such benefits. Only a small minority of private employees receive pensions, and few employers who agree to pay pensions to their retirees would agree to a full pension after a scant twenty years of employment.