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The Impact of Demographic Shifts on Public Pensions (And What They Can Do About It)
The workforce looks very different than it did just a decade ago—and there are more changes on the horizon.
By: Lizzy Lees, NCPERSThe workforce looks very different than it did just a decade ago—and there are more changes on the horizon. Currently, we're experiencing a ‘silver tsunami' as baby boomers enter their retirement years. And while an estimated 12,000 Americans turn 65 each day, birthrates in the US have reached a historic low.
These demographic shifts have already begun to present challenges as employers struggle to recruit and retain workers. The pandemic compounded these issues, and some industries are still facing severe labor shortages.
But in the public sector especially, these demographic shifts and workforce changes can have a very real impact on the long-term funding of a pension. When the number of retirees receiving benefits exceeds the number of workers contributing to the plan, the result is typically negative cashflow. These plans—often referred to as mature plans—are becoming increasingly common. Looking collectively at state and local plans in the US, all but four states had negative cashflows as of July 2023.
The rise in mature plans is occurring now because of a demographic shift the US began to see approximately 80 years ago. Following the second world war, the birth rate surged and has since continued to decline. So as the generation born 1946-1964 retires, in many instances the number of individuals collecting a pension exceeds the number of workers contributing to the plan.
But what can mature plans do in the face of negative cashflow? While it does present challenges, NCPERS has seen success stories across the country as plans take innovative approaches to fill the gap. For example, the Connecticut State Employees Retirement System was able to improve its funding levels and net amortization position by creating new revenue streams through progressive taxation. Other funds are successfully synchronizing investment and actuarial strategies with cashflow needs.
NCPERS' 11th annual Public Pension Funding Forum will highlight case studies from mature plans that have successfully implemented strategies to address negative cashflow and showcase solutions for funds looking to address these challenges. Held August 18-20 in Boston, this unique event brings together the public pension community to discuss emerging trends, innovative research, and to share solutions to enhance pension funding. View the agenda here, and register now to attend.
While shifting demographics may present a challenge, public pensions can adapt and continue to thrive. As resilient long-term investors, pensions have seen funding ratios rebound and continue to rise after each economic crisis. And in the face of unprecedented shifts in demographics, mature plans can successfully implement policies that enable them to provide secure retirements for generations to come.
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