Ted Ballantine | Pension360

Report Provides New Look at Public Pension Debt, State-by-State

Robert Sarvis and the Competitive Enterprise Institute have released a new report on public pension debt in the United States. The report draws from several estimates of pension debt and produces a list of states with the highest (and lowest) burdens of pension debt on their shoulders.

The report begins by laying out some of the reasons most states are shouldering massive pension debts:

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math. For years, state governments have understated the underfunding of their pensions through the use of dubious accounting methods. This involves using a discount rate—the interest rate used to determine the present value of future cash flows—that is too high. This affects the valuation of liabilities and the level of governments’ contributions into their pension funds.

More on the ‘bad math’ portion of that argument:

In defined benefit plans, states are on the hook for payouts regardless of their pensions’ funding level. Therefore, the discount rate used in the valuation of pension liabilities should be a low-risk rate, because of the fixed nature of pension liabilities. Ideally, this should as low as the rate of return on 10- to 20-year Treasury bonds, which is in the 3 to 4 percent range.

However, in the U.S., most state and local governments use discount rates based on much higher investment return projections, usually of 7 to 8 percent a year. This usually leads to state and local governments making lower contributions, in the expectation of high investment returns making up for the gap. However, while such returns may be achievable at some times, they need to be achievable year-on-year in order for a pension fund to meet its payout obligations, which grow without interruption. Therefore, failing to achieve such high returns can result in pension underfunding that extends into the future. Discount rates based on high return projections also incentivize pension fund managers to seek higher returns. This encourages in-vesting in riskier assets, which incur large losses for investors when they go south.

For years, this practice was validated by the quasi-private Government Accounting Standards Board (GASB). To improve accounting, GASB recently introduced new standards that have pensions deemed underfunded—those with a funding level of under 80 percent—use a lower discount rate. However, pension plans deemed to be above 80 percent funded will still be able to use a high discount rate. Thus, the new GASB standards do not go nearly far enough to end the dubious accounting practices that have exacerbated state pension underfunding by hiding its extent.

Of course, these factors affect different states in different ways. Not all states use an 8 percent discount rate, although many do. That’s why the report breaks down which states are the worst off based. We won’t give away the results–but there are some surprises. Click the link below to check out the results of this interesting study.

Read the full report here.

Understanding Public Pension Debt: A State-by-State Comparison

A new report is out from the Competitive Enterprise Institute, authored by Robert Sarvis.

From the abstract:

State government pension debt burdens labor markets and worsens the business climate. To get a clear picture of the extent of this effect around the nation, this paper amalgamates several estimates of states’ pension debts and ranks them from best to worst.

Today, many states face budget crunches due to massive pension debts that have accumulated over the past two decades, often in the billions of dollars. There are several reasons for this.

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math. For years, state governments have understated the underfunding of their pensions through the use of dubious accounting methods. This involves using a discount rate—the interest rate used to determine the present value of future cash flows—that is too high. This affects the valuation of liabilities and the level of governments’ contributions into their pension funds.

Read the full report here:

http://cei.org/sites/default/file/Robert%20Sarvis%20-%20Understanding%20Public%20Pension%20Debt.pdf

The GOP Is Floating A Pension Tweak to Fix the Highway Trust Fund – Is It A Good Plan?

We’re used to hearing news of pension wrangling coming from politicians on the state and local level–but today, we get some rare news of a pension debate happening in the United States House of Representatives.

First, some context: The Highway Trust Fund is going to run out of money sometime in August. It is funded by gas tax revenues, but that money has proved insufficient in the face of increased transportation spending.

Courtesy of the Department of Transportation

The Fund is a fairly important one: it is the source for federal spending on highways, roads, bridges and transit. So its insolvency, in short, is problematic. Democrats have previously proposed raising taxes to infuse the Fund with some extra cash. But Republicans have stood in staunch opposition to that method, and they’ve just recently come out with a plan of their own (and it involves pensions):

The proposal, which would be financed in several unusual ways, is expected to generate about $10 billion to keep the Highway Trust Fund from becoming insolvent on Aug. 1 and to pay for projects the fund does not cover. The committee will begin work on the bill Thursday.

The plan would be financed through a financial maneuver known as pension smoothing, which increases tax revenues by allowing companies to delay tax-deductible pension contributions, and by unspecified user fees. Money would also be transferred from a fund that is used to clean up leaky underground storage tanks.

In other words:

Essentially the GOP will allow private firms with retirement plans to contribute less to them next year. That will bolster firms’ profits and, therefore, increase tax collections. In other words Congress will violate its own standards, put into law to protect pensions with sensible accounting, for a short term revenue boost.

The plan would generate about $10 billion and would buy Congress more time to figure out a long-term fix to the HTF’s solvency woes. But it doesn’t come without its drawbacks, as Steve Malanga explains:

None of this is free, of course. Aside from the dangerous trend of allowing private firms to purposely underfund their pensions, the plan boosts federal revenues today at the cost of increasing the deficit over the long term.
Given this proposal, you would think that everything is just peachy with funding of private sector pensions in America. But The Pension Benefit Guaranty Corporation, which is responsible for insuring private pensions, just put out a report estimating it’s on an eight-year path to insolvency itself.
The nation’s laws dictating private sector pension standards were enacted to protect retirement plans. But Congress, in its endless quest for more revenues, can’t even live by the standards that it imposed on companies.

Mr. Malanga presents this chart:

Congress appears to be in a major conundrum–do they fund the HTF now at the expense of the future? Do they leave the Fund empty, and put many major infrastructure projects on hold? Or do they come up with another solution? The third option is simultaneously the most logical and the least likely. Stay tuned.

CalPERS Sends Message to Cities: Pay Up

In 2012, the city of San Bernardino, California made an unprecedented move: bankrupt and financially handcuffed, the town defied pension juggernaut CalPERS and simply stopped paying its contributions to the system. It has since resumed making those payments, but the fight is far from over. Now, CalPERS wants the city to pay back the payments it missed:

At issue is the $17 million in back payments and penalties that San Bernardino failed to make between declaring bankruptcy in August 2012 and resuming payments in July. Calpers has maintained that it is owed in full. But now in bankruptcy negotiations, the city is hoping to pay only a fraction of that, arguing that the city’s creditors must all share in the bankruptcy pain. The amount may be small, given the system’s assets, but if San Bernardino gets a reduction, the precedent could be huge, opening the door to other struggling municipalities using bankruptcy law to justify delaying or withholding payments to the pension system.

“This city has taken on the 800-pound gorilla, which is Calpers,” said Ron Oliner, a lawyer for the San Bernardino Police Officers Association, which represents the city’s uniformed officers. “Everyone in California is watching San Bernardino, and everybody in the nation is watching California.”

Calpers has for many years resisted all efforts to allow cities, for whatever reason, to stop making their required payments. (Federal law allows bankrupt companies to slow them greatly.) While agreeing that “significant progress has been made in the mediation,” Rosanna Westmoreland, external communications manager for Calpers, said the pension system’s hands were largely tied by statutes mandating that all the pension system’s participants make their full contributions on time and that no workers’ benefits be reduced. “It is the law,” she said.

The problem is that it remains unclear whether, in cases like this, federal bankruptcy law trumps state pension laws. A federal judge hearing the Detroit bankruptcy case ruled, for instance, that federal laws took precedence in that case, so the benefits of city workers in Detroit could be reduced in defiance of state law. But Calpers has insisted that this does not apply to the situation in California, an assertion that may be tested in court, if the mediation provides no solution.

Even before a recent wave of municipal bankruptcies hit California, the California Public Employees’ Retirement System, known as Calpers, had also insisted that under state law, no local government or public agency could reduce the benefits of current workers or retirees.

Cutting pension costs have proved difficult in California. That’s due to the so-called “California Rule”, which prohibits the rollback of pension benefits, even on a go-forward basis. Economist Sasha Volokh explains:

Most states are free to alter public employee pensions, as long as they do so on a purely prospective basis. For instance, a state can reduce cost-of-living adjustments (COLAs), say from 3% to 2%, as long as the amount accrued so far is still subject to the old COLA. But the rule is otherwise in California: California courts have held that ‘upon acceptance of public employment [one] acquire[s] a vested right to a pension based on the system then in effect.
In California, when a public employee begins work, he not only acquires a right to the pension accumulated so far—presumably zero on the first day, and increasing as he works longer—but also the right to continue to earn a pension on terms that are at least as generous as the ones then in effect, for as long as he works. And if pension rules become more generous in the future, then those more generous terms are the ones that are protected. Any changes to these rules must be reasonable, meaning that they ‘must bear some material relation to the theory of a pension system and its successful operation,’ and any disadvantages to the employees ‘should be accompanied by comparable new advantages.’ This is the ‘California rule.

Cities have tried to roll back their pension obligations. San Jose was one such city; earlier this year, it passed a plan forcing employees to pay more towards pensions. But the courts responded with a resounding “you can’t do that”. Volokh, for one, doesn’t like the economics behind that ruling.

When pensions are given special protection that’s unavailable for other job characteristics, the mix of wages and pensions is distorted relative to what it would otherwise be (given collective bargaining, tax policy, employee time and risk preferences, and other factors). If market or fiscal pressures mean government compensation must become less generous, it’s salaries and other benefits that must take the hit, even if some employees would prefer to take some of the blow in terms of decreased pension benefits. Those with shorter life expectancies — men, the less-educated, the poor, minorities, and those in bad health — suffer the most from policies that protect pensions at the expense of current salaries. Some of the pain will also fall on taxpayers, and some of that pain may result in trimming state government services (e.g., police, fire, garbage collection, DMV, schools). The California rule thus makes reductions in government compensation either more painful for employees or more expensive to taxpayers than they would be if pension terms could adjust together with salaries and other benefits.

Anyhow, CalPERS is setting a precedent with its action towards San Bernardino. It’s a precedent that indicates, bankrupt or not, cities still owe CalPERS its money.

Photo by Pete Zarria via Flickr CC

Alaska Prepares, Municipalities Brace for $3 Billion Pension Contribution

Most of the news coming out about pension contributions lately has centered on states who aren’t paying enough. But this news item is different–this is about a state going above and beyond the call of duty to try and fund its struggling pension system. That state is Alaska:

Moving to preserve the state’s top credit ratings, Republican Governor Sean Parnell signed legislation last month that takes the unprecedented step of tapping Alaska’s budget-reserve account to pay unfunded pension liabilities. It will pull $3 billion from the pool to reduce a $12 billion gap.
Home to the nation’s third-largest onshore oil reserve, Alaska gets 90 percent of its operating budget from crude-production taxes and royalties. It’s been saving oil proceeds for decades for when the wells run dry. Alaska is just one of nine states with top scores from Moody’s Investors Service and Standard & Poor’s, and it’s seen how pension deficits have hurt the credit standing of states such as New Jersey and Illinois.
“A year ago when I went to New York City and spoke with the rating agencies to make sure that we maintained our AAA financial credit rating on our bonds, they identified our unfunded pension liability as the single biggest risk,” Parnell said during a signing of the bill June 23 in Juneau.

In all, Alaska will put $1 billion in its PERS fund and $2 billion in its TRS fund. The system, which sports a funding ratio of just under 60 percent, is one of the unhealthiest in the United States.

It’s already figuring out where to put the PERS money. According to Pensions & Investments, $400 million will go to international managers, $200 million to a State Street Advisors Russell 1000 Index Fund, and a combined $400 million will go to fixed-income investments.

Alaska’s money-shifting is just one change to the state’s pension landscape. The other: a recently implemented law that extends the amortization period to 2039 and requires future contributions to be calculated based on level pay amortization. The goal: to boost the funding levels of PERS and TRS to 68.8% and 73.3%, respectively. But state municipalities don’t quite share that vision, mostly, they say, because much of the cost will fall to them.

Extending the amortization period, the time over which that debt would be paid, is comparable to the difference between a 15-year and a 30-year mortgage, [Alaska Retirement Management Board member] Kris Erchinger said. Essentially, the longer period allows lower monthly payments, but at a much greater total cost.
“It’s a better deal for the folks who have to balance the budget today because they have to pay less today,” she said.
“But projections of decline in oil production — oil revenues — does not bode well for our ability to pay those costs in the future,” Erchinger said.
While retirement board member Martin Pihl of Ketchikan joined Erchinger and others in praising the $3 billion, he doesn’t like the Legislature’s cost shift.
“I do have deep regret over what I feel is the unnecessary extension of the amortization period, bringing huge, huge, additional cost — like more than $2.5 billion to the people across Alaska — and forcing even greater numbers into state budgets down the line,” Pihl said.

That increased cost for municipalities stems from a 2005 deal in which state and local government officials negotiated a way to pay off the unfunded liability. It called for municipalities to pay an extra 22 percent of their payroll toward the back debt until it is paid off. Extending the amortization term by nine or 10 years increases the cities’ share while reducing the state’s share of that cost.

…

Board member Sam Trivette of Juneau said the level-percent-of-pay method adopted by the Legislature will result in less money going into the retirement trust funds initially, weakening them and driving up costs in the long run.
“That’s why we supported level-dollar,” he said. “A shorter amortization period saves everybody billions of dollars.”

Alaska’s oil revenues have allowed it to keep two rainy-day funds stocked with cash. The plan was always to use the funds to cover revenue shortfalls in years when oil prices drop, and to provide payouts to residents. But using the money for paying down pension obligations is a first:

One [rainy-day fund] is the $52.7 billion Alaska Permanent Fund, created in 1976 as the trans-Alaska pipeline neared completion. The pool was established to accumulate and invest oil-tax and royalty money in case the state runs out of crude and to give residents annual dividends. The payout was $900 in 2013 for every man, woman and child who met the residence requirement.

The second fund, the $12.7 billion Constitutional Budget Reserve, was created in 1990 as a rainy-day fund. Initially seeded with settlements from tax and royalty disputes with oil companies, the reserve plugs budget holes in years when oil prices drop and is supposed to be replenished in surplus years.
“Having an oil trust fund like that is unique,” said Keith Brainard, research director for the Lexington, Kentucky-based National Association of State Retirement Administrators. “I am not aware of a state that has dipped into reserve like this, at least in a substantial way like this, to pay down an unfunded liability.”

With Deadline Looming, Pennsylvania Gov. Refuses to Sign Budget Without Pension Reform

While most of the world was sleeping last week, lawmakers in Pennsylvania were scrambling to put the finishing touches on the state budget before the constitutionally-mandated midnight deadline. A little more than an hour before the clock struck 12, a budget was finally put on the desk of Pennsylvania Governor Tom Corbett. Only one problem: he won’t sign it. From the Philadelphia Enquirer:

Gov. Corbett refused late Monday to sign a $29.1 billion budget that the Republican-controlled legislature scrambled to deliver to him just 90 minutes before the midnight deadline.

The legislature approved a plan that includes some increased money for schools, and would not raise any taxes or impose new ones.

But Corbett, a Republican facing a tough reelection battle in the fall, signaled disappointment that the legislature was unable to deliver on one of his priorities: a measure that would change pension benefits for new employees.

“The budget I received tonight makes significant investments in our common priorities of education, jobs, and human services,” the governor said in a statement shortly before 11 p.m. “It does not address all the difficult choices that still need to be made. It leaves pensions, one of the largest expenses to the commonwealth and our school districts, on the table.”

He added: “I will continue to work with the legislature toward meaningful pension reform. I am withholding signing the budget passed by the General Assembly while I deliberate its impact on the people of Pennsylvania.”

It was unclear how long Corbett, who has often boasted of his record of delivering on-time budgets, would hold out. A protracted stalemate could affect the state’s ability to pay bills or workers.

The decision between funding pensions and funding the rest of the state is a difficult one. The ordeal has put Gov. Corbett in between a political rock and a hard place, and its unlikely he will come out of this process unscathed–at least in the electorate’s eyes:

Down by double digits in public opinion polls, Republican Gov. Tom Corbett has few good political choices when deciding by Friday whether to sign the state budget — except some high-risk options of taking on the Legislature, analysts say.

“None of them are great options for the governor in an election year,” said Christopher Borick, a professor and pollster at Muhlenberg College in Allentown. Corbett of Shaler trailed Democrat Tom Wolf of York by 22 points in a Franklin & Marshall poll last week on the November election.

And what are his options, exactly?

Corbett now could:

• Sign the budget;

• Let it become law without his signature on Friday, because a governor has 10 days to consider legislation before it automatically becomes law;

• Veto the entire bill;

• Veto some spending in the bill, including the Legislature’s funding.

Corbett could call a special session, which requires lawmakers to gavel into session, but he cannot compel them to consider pension reform if they return.

Over the years, special sessions have had mixed success, experts say. The governor sets the agenda. Topics have included gun control, crime, transportation and property tax reform.

Lawmakers can gavel out of special session and into regular session to consider anything they want.

“It seems like a no-win situation,” said Michael Federici, a political science professor at Mercyhurst University in Erie. “The closer you get to an election, the less willing Republicans will be to sign on” to pension reform.

Gov. Corbett needs to make a decision by Friday–if he doesn’t veto the bill, it will automatically become law.

Photo by Keith Ramsey via Flickr CC

Survey: Public Employees More Confident They’ll Have Comfortable Retirement Than Private Sector Counterparts

It’s a question that goes through the mind of everyone: Will I have enough money saved to live comfortably and securely when I retire?

A new survey from Pew Charitable Trusts asked that very question. Turns out, when it comes to retirement, the minds of public sector employees are more at ease than the American workforce on the whole:

According to a survey from The Pew Charitable Trusts, 69% of public employees said they were very or somewhat confident they would have enough money to live comfortably in retirement, compared with 55% of [private and public sector] Americans surveyed for the Employee Benefit Research Institute’s (EBRI) 2014 Retirement Confidence Survey. Female public employees were less likely than men to express confidence in their retirement situation: 63% of women said they were very or somewhat confident, compared with 77% of men.

But perhaps the most shocking reveal of the survey was that one of every five public employees didn’t know what kind of retirement plan was offered by their employer.

One-fifth of state and local workers polled said they did not know what type of retirement plan their employers offer. Women were more likely to say this (23%) compared to men (15%). In addition, workers younger than 50 were more likely to report that they did not know what type of retirement plan they have than were workers 50 or older.

Graph courtesy of Pew Charitable Trusts

Other interesting tidbits from the survey:

Slightly more than half (54%) of state and local public workers said they expected to retire at age 65 or later. Of this group, 25% said they expect to retire at 65, and 29% said they expect to retire after 65. An additional 4% of respondents volunteered that they do not ever expect to fully retire. These results are similar to findings in the EBRI survey.

And how plan design affects retirement decisions:

State and local employees said retirement plan design affects decisions about when to stop working. Eighty percent said they think some government employees who want to leave their jobs keep working until retirement age so they will not lose retirement benefits, including 60% who said they think this happens a lot. Fifty-six percent said they think some workers retire earlier than they would like in order to maximize retirement benefits, including 31% who think this happens a lot. Overall, 88% of respondents said they think workers either work longer or retire earlier than their preference in order to maximize retirement benefits, including 48% who think both things happen.

Many employees also think their plans are in need of changes, whether they be minor tweaks or major overhauls:

Thirty-five percent of respondents said their employer’s retirement system needs changes, including 12% who said it needs major changes. Sixty-one percent said they think their employer’s retirement system should be kept as it is. Those with lower confidence in their ability to live comfortably in retirement were more likely to say they would like to see changes. So were women (38%) compared with men (30%).

Photo by Robyn Lee via Flickr CC

Illinois Supreme Court Ruling Casts Bad Omen on State’s Pension Reform

While the rest of the country celebrated Fourth of July weekend, members of the Illinois pension sphere got to watch some fireworks of their own. A key Illinois Supreme Court case was decided over the weekend, and the decision does not bode well for the state’s landmark pension reform. (The full court opinion can be read at the bottom of this page.)

According to the 6-1 decision, the pension protection clause — which says that retirement benefits are a contractual agreement that “cannot be diminished or impaired” — applies to other retirement benefits, not just pensions. That overrode the state’s argument that its emergency powers, in dealing with its budget crisis, justified an increase in what retirees must pay for their health benefits.

The court rejected the state’s argument that health care benefits are not covered by the pension protection clause, finding that there is nothing in the state constitution to support that. The only question now is whether the reduction in the state’s health care subsidies constituted an impairment or diminishment of those benefits.

Although the ruling doesn’t directly apply to pensions, the writing seems to be on the wall.

“If the justices can read the pension clause of the constitution to protect health benefits, they certainly would use it to protect pension benefits,” former state Budget Director Steve Schnorf said.

“This bodes very, very ill” for the pension cuts the Legislature approved for state workers, and for a similar set of trims Mayor Rahm Emanuel wants for his workforce, he added.

Time after time, without finally resolving the issue, the court seemed to go out of its way to knock down any changes not agreed to by workers unions, and perhaps by each individual worker.

For instance, one argument defenders of the new pension law have offered is that unfunded pension liability now is so large — $100 billion in the state funds, and at least $32 billion in the city funds, for instance — that government has a right to order changes, using its so-called police powers, to set spending priorities. But, said the court, “In light of the constitutional debates, we have concluded that the (pension) provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

In other words, pony up.

And as far as Cost-of-Living Adjustments:

Another argument offered by reform proponents is that annual cost of living adjustments in pensions are not protected by the state constitution in the same way that a person’s original pension is. In other words, a worker who initially got, say, a $3,000-a-month pension is entitled to get it and no more in the future, regardless of inflation. COLAs are far and away the biggest element in the retirement-funding crisis.
But, ruled the court, “Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner. ”
So, the current 3 percent guaranteed annual COLA would appear to be here to stay.
Ironically, such an interpretation would apply both to the pension reform bill pushed by Gov. Pat Quinn that’s working its way up to the Supreme Court and to an alternative plan offered by his opponent Bruce Rauner. The GOP gubernatorial candidate proposes moving workers to a defined-contribution system that caps state funding.

Many believe lawmakers should now be scrambling to come up with a Plan B to reform pensions in a way allowed by the courts:

State and local lawmakers had better get working on a Plan B. Illinois needs alternatives to the state pension-reform law passed in December and to the Chicago pension-reform law passed in May. The options are limited — it may come down to a constitutional amendment — but the state’s best minds better get cracking.
It isn’t an exaggeration, even in the slightest, to say Illinois’ future depends on it.

There is now but one key question: Does a viable pension reform alternative exist? A bill pushed by Senate President John Cullerton, considered an alternative by many, is now almost certainly off the table. That bill gave workers a choice between full pension benefits or subsidized health care — choose pension benefits and health care would be cut. Given Thursday’s ruling, that now seems highly dubious.
One possibility would be to amend the constitution to modify the pension protection clause — not eliminating it but weakening it some. However, this is a lengthy process and may still not protect the state legally if it reduces benefits already promised.

Read the court’s entire opinion here:

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Photo by Mr.TinDC via Flickr CC

Reform Watch: Australia To Raise Retirement Age to 70

The world is now watching Australia as the country readies itself for a bold shift in pension policy: raising the retirement age to 70, which would be the highest retirement age in the developed world.

Australia’s workers had previously been able to retire at 65. The five year increase will be phased in over many years, and will take full effect in 2035. The plan was announced by Australian Treasurer Joe Hockey:

Hockey is part of the Liberal-National coalition that won power in September, pledging to end what he called the nation’s Age of Entitlement and repair a budget deficit forecast to reach $49.9 billion AUS this fiscal year. Australia is leading the charge for a group of advanced economies from Japan to Germany that are pushing the retirement age higher to head off a gray disaster caused by a growing army of pensioners and a declining pool of taxpayers.

The ratio of working-age Australians to those over 65 in the world’s 12th-largest economy is expected to decline to 3-1 by 2050 from 5-1 in 2010. In Japan it’s already below 3-1 and in Germany it’s close to that level, according to the International Labor Organization.

“While Australia may be the first to raise the age to 70, it won’t be the last,” said Steve Shepherd of international employment agency Randstad Group in Melbourne. “The world will be watching this.”

Australia’s 2.4 million state-retirement-age pensioners draw about $40 billion AUS a year, making it the largest government spending program. That’s forecast to rise 6.2 per cent a year over the next decade, according to an independent review commissioned by Prime Minister Tony Abbott. The program provides the main source of income for 65 per cent of retired Australians.

Failure to rein in the program would put a greater onus on younger workers to fund it through increased contributions and taxes. Raising the pension age may also mean more competition for those just starting in the workforce. Unemployment among those aged 15-24 reached a 12-year high of 13.1 per cent in May, more than double the national average of 5.8 per cent.

It’s also interesting to note the results of a recent study on retirement age:

Research shows many people struggle to work until they are 60, let alone 70. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows that the average retirement age from 2003 to 2011 for men was 62.6 years old and for women it was just under 60. While that is rising, it is still well below the current retirement age of 65.

And the HILDA data shows, for men, nearly half of all retirements are involuntary with most due to poor health. Women are more likely to retire on their own terms but still 43 per cent retire due to reasons such as ill health, losing their job or having to care for others.

The rest of the world will be happy to sit on the sidelines and watch this fascinating policy shift play out.

The Last Half-Decade of California’s Pension Contributions, Visualized

California actually has a good track record making its payments to CalPERS — unfortunately, the same can’t be said for CalSTRS. Even so, the state’s track record on both fronts got better last week when lawmakers upped its 2014 payment to the two systems by a combined $1 billion.

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Contributions to CalPERS aren’t the problem; the state has made good on their Actuarially Required Contribution for years now (although, if we’re being honest, the fund could always use more state dollars. And there’s no rule against paying more than 100% of an ARC). But CalSTRS is another story.

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California took a step forward last week by increasing its contribution for FY 2014-15. But there is still much work that needs to be done.

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