Pensions at risk around the world

Should broke governments break their promises to pensioners?

By Nicholas Nehamas

Your pension might be in trouble.

Many states are finding they can’t keep promises made to public employees in good times. It’s a problem that isn’t isolated to this country, either. From the Eurozone to Britain to South Korea, governments are facing steep bills to finance former workers’ golden years.

A new study by the Pew Center has found that in the U.S., state pension systems are underfunded by a whopping $757 billion. The states also owe retirees an additional $627 million in health care costs.

How did it happen?

The economy is still struggling and federal stimulus money has largely been spent. That means states are short of cash and raiding their pension funds to pay for basic services as taxes and other revenues remain meager. In the absence of new funds, governors say raiding pension funds is the only way to balance the books.

In New Jersey, for example, Gov. Chris Christie has denied 800,000 retired public employees routine cost of living increases. A Superior Court judge in the Garden State recently ruled that, although the law guarantees the increases, the state is not obliged to pay. That means trouble for one pensioner, 73-year-old Jack Farley, a New Jersey native who now lives in Fort Lauderdale, Florida. Farley, who asked not to have his picture taken for this article, says that even in tough times states are obligated to cover the benefits they’ve promised employees.

Farley: “A guy gets a company in trouble and bails out and he ends up with $27 million. Come on! It’s a joke…”

So what’s a state to do?

Florida had a fully funded pension system just two years ago. In 2010, according to the Pew study, it paid 107 percent of the recommended contribution to its state pension plan. Today, the Sunshine State finds itself $27 billion in the hole. And it’s doing better than many states (Pew’s data shows the most endangered public pensions are in Illinois, Kentucky and Connecticut).

But things here aren’t as bad as they are in Britain, where the government of Prime Minister David Cameron remains firmly committed to austerity policies that could cut into pension payments. Doctors there went on strike yesterday for the first time in 37 years, arguing that Cameron’s belt-tightening policies mean they now contribute more to their pensions while receiving fewer benefits. Reports estimated that 30,000 non-essential surgeries were canceled due to the strike. The government claims that doctors are overcompensated and the brunt of funding their pensions falls on taxpayers.

Robert Gardella (R) and his friend Barry Shapiro in Fort Lauderdale. (Carey McKearnan)

Tax or cut services?

Robert Gardella, 67, also of Fort Lauderdale, argues that cutting services or skipping out on pension obligations is not the answer for the states. Instead, he suggests a tax hike. Firefighters, policemen, teachers and yes, even those oft-criticized Registry of Motor Vehicle employees provide valuable public services and should be generously compensated, says Gardella.

But proponents of austerity say that tax hikes, even on the wealthy, are the last thing struggling economies need right now. As a result, government workers are finding that security in their old age might be a thing of the past.

Gardella: “We need to share our burdens…”

Risky Business

Part of the problem might be that state pension funds are simply making bad investments. South Carolina, for example, entrusted its pension fund to a Lamborghini-driving financier named Robert Borden. Since taking office at the start of 2011, Mr. Borden, a Republican, has invested South Carolina’s money into high-risk, high-reward investments. The New York Times reports that last year alone the state paid $344 million in fees “to a Who’s Who of hedge fund managers and private equity deal makers.”

South Carolina now finds its pension fund $14.4 billion in the hole. Mr. Borden has since joined a private investment firm.

South Korea plays it safe

Seunggeun Park in Fort Lauderdale. (Carey McKearnan)

South Korea has taken the opposite approach. Worried about the European debt crisis, the Asian nation’s pension fund managers are taking their money out of international equities and investing more and more in their domestic stock market. 

But that hasn’t eased the concerns of one of its citizens, Seunggeun Park, 36, a South Korean visiting Fort Lauderdale with his wife. He said he’s worried about the future of his pension, and the state of the South Korean economy more generally.

Park: “That’s my money! It’s gone…somebody took my money but I couldn’t see him or her!”

What do you think? Are public employees in your state or country overpaid? Or is the government breaking promises it should be keeping because it doesn't want to raise taxes? Join the discussion below.

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Audio recorded by Carey McKearnan