Will taxpayers be forced to make up for weak state, local governments’ pension returns?

State and local government pensions in the United States are having one of their worst years since the so-called economic recovery. New data suggest that public pensions returned a mere 3.4 percent, which is the smallest showing since 2012. Will taxpayers be forced to make up for the weak returns?

According to data released Tuesday from Wilshire Associates Inc. (via Bloomberg News), state and local government pensions produced median increases of 3.4 percent for the 12 months ending Jun. 30. Pension plans with assets larger than $5 billion reported a median increase of 3.6 percent. The tiny returns were due to significant losses in international stocks and tepid bond returns.

In most instances, public pensions produce returns of about seven to 8.5 percent, sometimes greater. This was the smallest increase since the fiscal year 2012 when they garnered 1.5 percent returns.

An example is the California Public Employees’ Retirement System, which is the largest pension in the U.S as it maintains $300 billion in assets. In the fiscal year ending Jun. 30, it reported returns of just 2.4 percent, far below its projected 7.5 percent.

The financial analysis suggests turbulence in the global market hurt international stocks, while the bond market returned on average just under two percent.

In the financial industry, a portfolio of 60 percent stocks and 40 percent bonds returns around five percent.

Taxpayers to Cover the Burden?

This is bad news for the taxpayers. Why? Because when pension plans don’t reach their target investments then taxpayers have to make up for the losses or short gains. Since the financial crisis, many have argued that governments need to boost their pension contributions, though where the money comes from remains uncertain. Pensions are facing significant holes because of benefit increases, growing retirements and declining public workforces.

The future of workplace pensions is unknown in both the public and private sector. Governments can’t afford to pay for pensions, while companies can’t afford to keep pensions. This is why retirement pension plans have been going down in corporate settings; bankruptcies, constant changing of jobs and rising labor costs.

“Bankruptcies in the airline and automobile industries have provided opportunities for these companies to get out from under what they viewed as long-term cost obligations,” says Barry Gerhart, professor of management and human resources at the University of Wisconsin. “[The pension commitments] were playing a key role in preventing them from being competitive or even turning a profit.”

And here is a very interesting statement from Stan Haithcock, an annuities consultant: “Pensions are financial dinosaurs, especially in the private sector. You will never see them return.”

The conclusion is that pensions, whether in the public sector or the private sector, are coming to an end. We can’t afford them anymore. And since the private sector isn’t offering adequate pensions anymore, governments have decided to take it upon themselves to establish their only government-controlled pension systems, which will then run out of money in a few years like Social Security and Medicare (SEE: 11 million people face cuts as Social Security Disability Insurance benefits run out in 2016).