Can Another Detroit-Style Pension Crisis Be Avoided?

Detroit’s ballooning deficits and large pension shortfall in December made it the largest U.S. city so far to become legally eligible for Chapter 9 bankruptcy.

It was emblematic of the growing crisis facing state and municipal pensions systems across the country. States have posted funding shortfalls of more than $1 trillion.

A new analysis by The Geneva Association, an international insurance economics think tank, suggests that nonpayment of annual required contributions and excessive reliance on single sources of funding in pension planning are among the biggest challenges to overcome.

The report references a 2010 report by the Pew Center on the States, which found that the huge shortfall facing state and local retirement systems was due to policy choices and a lack of fiscal discipline, namely, failure to make annual payments for pensions systems at actuarially recommended levels and expanding benefits without considering their long-term costs.

Thirty-four states had a funding level below 80%, Pew reported.

Financing retirement is an ever-growing challenge because of higher life expectancy and low fertility rates. The Geneva Association noted it had long advocated a four-pillar approach to sound pension planning:

1. A universal public system such as Social Security
2. An occupational pensions system supported by employers under government financial supervision
3. Private savings using financial intermediaries
4. Continued employment through the removal of barriers to partial employment of retirees.

The analysis found that excessive reliance on one of the four pillars — particularly a public system or private savings only — strained public finances or an individual’s ability to finance retirement adequately.