Employee Benefits Systems: Retirement Plan Underfunding

Retirement plan underfunding is a gigantic, yet little recognized, problem in the employee benefits systems of America's states. At the Tennessee Valley Authority (TVA), the problem is so severe that TVA has faced a backlash.

Gigantic Retirement Plan Underfunding in Employee Benefits Systems

The nation's pension shortfall within the employee benefits systems of its states is gigantic. Some economists predict retirement plans in 20 states will run out of money by 2025.

States are $1-trillion short of being able to afford the retirement benefits they have promised workers, according to a study of employee benefits systems conducted by the Pew Center on the States.

An Epidemic of Underfunding

Nearly 100 state-run public employee pension systems in the United States are underfunded.

Some of the employee benefits systems in the most dire straits include:

South Carolina Police with only 63.3 percent of the money needed to send out future paychecks
West Virginia Teachers with only 43.3 percent
Rhode Island with 58 percent

Thanks to the Center for State and Local Government Excellence for this information.

A Sleepless Budget in Seattle

The City of Seattle will have to substantially increase the amount of money it pays into the retirement portion of its employee benefits systems to cover future obligations because its related investments took big hits during the economic meltdown, according to a report recently presented to the City Council. This news comes at a hard time for a city budget that is already falling apart.

As of January 1, 2008, the city's retirement funding ratio was 92.4 percent, the report on the city's employee benefits systems said. That's the ratio of the assets the city had compared to what it owes for benefits earned by employees. But by January 1. 2010, just two years later, the funding ratio had dropped to 62 percent - mainly because the city's stock market holdings tied to retirement accounts dropped 20 percent and other factors.

An Audit of the TVA

The Tennessee Valley Authority (TVA) has been failing to put enough money into its employee retirement fund while raising retiree benefits and incentives for the past 20 years, according a new agency audit. The audit points to serious judgment flaws in its employee benefits systems management.

At some points during those 20 years of neglect, the TVA was flush with cash, yet failed to make up its retirement fund shortfall. TVA’s inspector general said the federal utility cut its share of retirement contributions in half during the 1990s and later quit making any contributions for six years, despite rising benefit expenses for TVA and increased retirement contributions by most other utilities.

When the market slump cut the value of TVA’s investments in 2008 and 2009, the utility’s once-well-off employee benefits systems retirement plan shrank to $3 billion below what the experts said it needed to meet future obligations. As of 2010, the retirement program had about a $6.6 billion program, or 83 percent of the desired level.

TVA has moved to strengthen its employee benefits systems with a $1 billion contribution and $300 million in benefit cuts. TVA directors have also agreed to a retirement system board plan to eliminate any inflationary increases through 2013.

Save Our Retirement, Inc.

In 2010, Jim Hovious, an engineer from Soddy-Daisy, Tennessee, headed a group at the TVA known as Save Our Retirement, Inc. Hovious is asking employees and retirees to donate money so they can hire attorneys to fight a change in pension payouts within the TVA employee benefits systems that the group contends is illegal.

Critics of the changes adopted last year include three employee representatives on the retirement board. They contend that TVA should make up for its retirement system shortfall that had resulted from investment losses. They claim the utility's employee benefits systems took advantage of earlier investment gains to reduce employer contributions from 1990 through 2009.

Topic: The Defined Benefits Plan

Subtopics: Defined Benefits • Demise of Defined Benefits • More Demise • Underfunding • ERISA