NCPA - National Center for Policy Analysis

Low Interest Rates Squeezing Pension Funds

September 2, 2010

As interest rates plunge in an attempt to save the U.S. economy and banking system, managers of public pension funds are having a tough time filling the widening gap between assets and liabilities.  That's because tax revenues, the main source of funding for most state pension funds, have fallen sharply since the recession began in December 2007:

  • The largest states, such as California and New York, face the biggest budget gaps.
  • But the pension squeeze is even worse for a handful of smaller states.
  • That's because the size of their pension fund shortfall is much larger in relation to the size of their economies.

"If it takes up a large amount of their gross domestic product (GDP), essentially they are going to have to grow their way out of this," says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis (NCPA). "It's just not feasible."

  • Connecticut, for example, which has only 27 cents set aside for every dollar of pension liabilities, will have to close a funding gap that represents roughly a third of its GDP, according to an NCPA analysis.
  • The shortfall for Kentucky, which is only 37 percent funded, amounts to 36 percent of GDP.
  • Hawaii, which has set aside only 31 cents per dollar of pension obligations, has to come up with an amount equal to 37 percent of GDP, according to NCPA figures.

States have limited ability to borrow money to shore up pension funds; when they do, they simply defer the day of reckoning.

Source: John W. Schoen, "Low interest rates squeezing pension funds,", September 2, 2010.

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