Public pension hole now $11,000 per U.S. worker

Top state and local pension funds lost $250 billion on the markets during the month of June and are down more than $600 billion for the year, according to a new study.

The 100 biggest public sector pension funds were a staggering $1.5 trillion underfunded by the end of June, according to the latest survey by analysts at Milliman. That funding gap will ultimately be the responsibility of taxpayers if the pension plans can’t make it up through investments. The gap is equal to more than $11,000 per full-time U.S. worker.

On the bright side, pension fund investments did better than a balanced portfolio of 60% stocks and 40% bonds through the first half of the year. They were down 12.3% by June 30, while the Vanguard Balanced Index Fund

was down 17%, and a portfolio of 60% Vanguard Total World Stock

and 40% Vanguard Total World Bond


On the gloomier side, this investment performance will include optimistic valuations of illiquid assets like private equity and venture capital.

Oh, and it left the pension funds 26% unfunded by June 30, meaning they only have 74 cents in assets for every dollar of liabilities.

It’s easy to hope for better times ahead, and maybe we should. On the other hand, cynics note that this funding gap comes after an unprecedented 40-year bull market in U.S. stocks and bonds. From 1982 to the present, the S&P 500

has beaten inflation by an average rate of 10.4% a year, 10 year Treasury bonds

by 5.2% and investment grade corporate bonds by 7.2%. These numbers are all way, way ahead of the historic averages. We had better hope future returns don’t end up “reverting to the mean.” 

If they do, pension fund levels may get worse, not better.