Millions of Americans are partially or wholly banking on some form of pension funds for retirement, whether they they work for a large corporation, a municipality or a given state. The problem is that many of these pensions — such as Calpers, which is the pension and health benefits system for well more than a million of California’s public employees — are underfunded.
What’s “underfunded” mean, exactly? It means many of these pension funds do not have adequate assets to pay out the full 100% of benefits due to their workers for the entire period of time they are projected to have to do so.
That means that all government workers need to be aware that they cannot, and should not, assume their pension funds will provide for them in retirement.
Instead, you need to have alternative plans in place, and that means investing on your own right now. Start learning the basics, and start setting money aside. (And sign up for a stock advisory newsletter like The Liberty Portfolio, which I’ll be launching shortly.)
Calpers — the California Public Employees’ Retirement System — has been in the news quite a bit this past year. And because it is only 76% funded, it is a clarion call to government workers to wake up before it’s too late. As the New York Times reports. Calpers is “considering cutting its investment return assumption.”
In 2012, it cut the assumption by 0.25% to 7.5% annually, while returning 5.1% annually over the past 10 years, according to the NY Times. Last week, it dropped the expected returns to 7%. Along with it, Calpers is monkeying around with what higher rates local governments are going to have to pay to get the $139 billion unfunded liability to go down. Employers may face a 30% to 40% increase in payments. That’s just insane, because that money means more tax increases.
Let’s face it: Getting the unfunded liabilities down to zero will never happen. It’s like any government program — once the debt or unfunded portion gets past a certain point, the ship has begun taking on water.
So what can middle-aged employees do to anticipate a reduced pension payout?
Investing on Your Own
The investment approach will need to be different from that of the Calpers fund. Page 99 of the its financial report shows that “your” money is already spread around many of the top equity names already: Apple Inc. (NASDAQ:AAPL), Exxon Mobil Corporation (NYSE:XOM), Microsoft Corporation (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ) and AT&T Inc. (NYSE:T), just to name the top five.
Without seeing a complete set of portfolio holdings, it is difficult to say where I think Calpers is underweighted inappropriately. However, considering the overall returns of the fund compared to the S&P 500 Index and other benchmarks, it sure looks poorly managed overall.
I tend to believe that most funds and managers are underweighted in value stocks, small caps and in preferred stocks. I think most are vastly overweighted, and wrongly so, in bonds. Preferred stocks and baby bonds (also known as exchange-traded debt) offer higher yields with comparable risk to government bonds.