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The Great Recession's Next Wave

The "pension holiday" taken by New Jersey state officials was just the start of the problem.

From 1997 to 2003, the state made virtually no contributions to two giant pension funds for teachers and state and local employees, funds that today pay 215,000 retirees more than $5 billion a year. Instead, officials resorted to gimmicks — overvaluing the pension funds, creating and then short-circuiting separate benefit accounts, and announcing and then abandoning a plan to gradually comply with the annual contribution levels required by law.

Finally, the state's failure to fully disclose the slipshod financing of the two pension funds to prospective buyers of state bonds drew the attention of the Securities and Exchange Commission. In August, the SEC ruled that New Jersey had committed a fraud, and the state agreed not to do it again. Now, concerned SEC officials are examining public pension funds in other states.

It's a grim picture.

Employees' public pension and health insurance funds were underfunded by more than $1 trillion in 2008, according to the Pew Center on the States. And that was before the Wall Street and real estate collapse. Increasingly, pension news is making headlines around the world. On the same day the SEC announced its ruling, articles documented underfunding and questionable use of pension funds in six states and eight countries on five continents. A Wall Street Journal op-ed essay warned: "Unfunded Public Pensions — the Next Quagmire."

Private pensions, which provide retirement benefits to twice as many people as public pensions, face problems of their own. Most businesses have replaced traditional defined benefit pensions with 401(k) plans, which leave management of the funds to individuals. This transfer of responsibility — and hazard — has occurred as private pension funds' value dropped 9.5 percent in three years, putting individuals at even greater risk.

Here's the harsh math: Too often, the money older Americans are counting on to help finance their retirement won't be there. Boston College's National Retirement Risk Index forecasts that as many as 51 percent of American households will be unable to maintain their standard of living once they retire. That's a seven-point jump in the last two years.

In a larger context, it's clear that as brutal as this recession has already been, it's not over. The next wave will directly impact older Americans — with either higher taxes or reduced benefits.

That creates multiple challenges — a new era of creative thinking for an older America by government, by business and by ourselves. Governments can no longer ignore or postpone the obligation of properly funding public pensions. Businesses must allow employees to automatically enroll in 401(k) plans and at the same time find ways of keeping older workers on the job. The individual challenge is prudence: Find new ways to save, do the calculations, and get your financial house in order. Otherwise we are on an unsustainable path.

"Pension holidays" as practiced by New Jersey were a bad idea. "Benefit holidays" would be worse. ­

Jim Toedtman is editor and vice president of AARP Bulletin.