Pension Shortfalls Reach the Trillions
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I'm J.R. Whalen in New York. Some pension recipients have agreed to as much as a 55% reduction in benefits owed to them. We'll explain why in a moment. First, these money headlines. American workers in the U.S. received their biggest pay raises in nearly a decade in June. That's a sign the strong labor market and low unemployment is boosting wages as employers compete for scarcer workers. Private industry workers saw total compensation in the second quarter rise 0.6% from the prior quarter and increase 2.9% from a year earlier. The year-over-year gain was the strongest since the second quarter of 2008. One industry that is feeling the pinch by not raising wages is the construction industry. The industry is having a hard time attracting workers age 24 or younger.
Some observers pin the blame on high schools that had cut vocational training programs during the recession and are only now bringing them back. While some point to parents' desire for their children to get a college degree and the allure of technology jobs and the high cost of living in areas where jobs are plentiful. But regarding wages, builders say that rising land, material and regulatory costs are already squeezing their margins. And if they pay workers more, it'll raise the price of homes beyond what many people can afford. And Procter & Gamble says it is raising prices on some of its biggest brands, like Pampers diapers and Bounty paper towels. P&G is just the latest big U.S. company raising prices amid a strong U.S.
economy and healthy consumer spending. The increases go into effect later this year or in early 2019. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. There are a lot of uncertainties facing people on the verge of retirement, not the least of which is whether their pension funds will be available. The shortcomings in state and local pension plans in the U.S. is staggering, and Wall Street Journal reporter Sarah Krause is here to discuss. So, Sarah, some estimates put the number as high as $5 trillion?
That's right, which is roughly the size of Japan's GDP. So just for perspective, that's a staggering figure. Oh, wow.
And it's not like employees have trailed off paying into state and local pensions. The contribution rate has actually been rising all along.
Yes. In some cases, for some plans, it's been rising. In others, it's held steady. I mean, the reason for this problem is multifold. There are overly generous promises made by politicians, overly ambitious demands by unions. The crisis in 2008 knocked the value of these pension funds by quite a lot. I mean, even though we've had a bull market since then, they've yet to recovered. In some cities and states, governments haven't made their required contributions. They've used that money for other purposes. So there's a confluence of a lot of different events that have led us here. But the net result of that is these plans simply don't have enough money to meet their obligations in many states and towns.
It seems like when things are good, when the economy is good and there's lofty conditions, a lot of promises get kind of thrown around.
Right. I mean, when things are good, it's easy to say, yes, we'll kick in this much and you'll be able to retire comfortably and have this sort of ongoing income for a long time. And for some of these plans, there was actually a period in the late 1990s where they ran a surplus. It's been in fairly steady decline since then, certainly exacerbated by the financial crisis. And now the reason we wrote this story now is we're sort of getting to this tipping point where a growing number of municipalities are starting to get to a point where they're going to run out of money. And so one of the places we went in the story was to Central Falls, Rhode Island, which is a city – North of Providence that in 2011 filed for bankruptcy.
And as part of getting out of that bankruptcy, firefighters and police there, retired firefighters and police agreed to cut their pensions by as much as 55 percent for fear of losing even more.
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