From the September 2009 issue of Investment Advisor • Subscribe!

September 1, 2009

Pensions, Social Security Face Challenges

Funding levels drop; Social Security predicted to go broke in 2043

Pension plans' funded status and the outlook for Social Security continue to appear bleak.

A new study by global consulting firm Mercer has found that after having seen some rebound in 2008 year-end lows, the funded status of pension plans for S&P 1500 companies fell again in July for the third consecutive month. "Although equity values are increasing," Mercer says, "so is the value of plan liabilities--caused by falling yields on corporate bonds--so that the net impact in July was a decline in funded status."

Meanwhile, other troubling news about Social Security was released in August by the Congressional Budget Office (CBO). The CBO stated in its long-term Social Security projection that without changes in law, CBO expects that the Social Security trust funds will be exhausted in 2043. "If that point is reached," CBO said, "the Social Security Administration will not have the legal authority to pay full benefits and the amounts that could be paid would be about 17% less than those scheduled under current law." The CBO states that "Social Security's annual revenues currently exceed its annual outlays, but as the baby-boom generation continues to age, growth in the number of Social Security beneficiaries will pick up, and absent legislative changes, outlays will increase much faster than revenues."

As for the Mercer study, it found that the funded status of pension plans sponsored by S&P 1500 companies deteriorated by $34 billion during the month of July, bringing the estimated aggregate deficit to $279 billion, up from $245 billion at the end of June. "The aggregate funded status was 81% as of July 31, down from 82% as of June 30," Mercer said. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75%, the consulting firm said.

According to Adrian Hartshorn, a member of Mercer's Financial Strategy Group, the strong positive return from equities of 7.4% during July "helped increase the estimated aggregate value of assets in pension plans sponsored by S&P 1500 companies by 6.2%." However, Hartshorn continues in a prepared statement that "falling yields on AA corporate bonds (the yield on the Mercer Yield Curve fell from 6.79% to 6.10% in July) means that the liability values of pension plans for the same companies increased by 7.6%. Companies should focus attention on the return relative to the liabilities, which was negative 1.3%."

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