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Forty years ago, Baby Boomer were entering their prime earning years. Opportunity in the land of America was expanding at a rapid clip. The level of education was rising among those entering the workforce vis-à-vis their older counterparts at the same time women were growing the overall workforce (just under half of women worked then; today it’s 70 percent). In the simplest terms, the size of the pie was growing.
Today, roughly 10,000 Boomers exit the workforce every day, which should present an opportunity in and of itself for Millennials to backfill the depleting workforce. Census data tell a different story. In 2016, median personal income for workers aged 24 to 34 was $35,000. In modern dollar terms, that same age cohort was earning $37,000 in 1975.
It’s difficult to square lower earnings with the educational makeup of the labor force. In 1975, 23 percent of young workers had earned a bachelor’s degree. Forty years on, 37 percent have achieved the same. Shouldn’t that improvement have lifted per capita earnings?
It comes down to comparative advantage. Back then, it was easy enough for a younger, better-educated worker to displace an older, less-educated and therefore less-qualified older worker. Today’s workforce is largely educated and intent on working longer; it’s stickier and less tractable. At the same time, the double governors of technological innovation and globalization have reduced the aggregate demand for warm bodies.
At the risk of getting buried in the weeds, there are more workers exiting the workforce than there are those joining it. Those making way for the exits are otherwise known as ‘retirees.’ It is at this critical juncture that municipal finance re-enters the picture.
As has been written on these pages, over the past few years, public pensions have been reducing the stated returns they anticipate their portfolios generating on investments. These reduced expectations necessarily trigger the need for higher contributions on the part of state and local governments.
That’s exactly what took place last year. The Census’ 2016 Annual Survey of Public Pensions found that state and local government contributions rose by 6.5 percent to $191.6 billion from 2015’s $179.7 billion. By contrast, earnings on investments, which include both realized and unrealized gains, tumbled 67.9 percent to $49.9 billion from $155.5 billion in 2015.
Meanwhile, the number of pensioners collecting checks marched upwards to 10.3 million people, up 3.3 percent over 2015. The benefits they received last year rose even more, by 5.4 percent to $282.9 billion from $268.5 billion in 2015. And finally, total pension assets fell 1.6 percent to $3.7 trillion from $3.8 trillion the prior year.
In the event you sense you’ve been felled by death by numbers, back out to the big picture. Paid benefits exceeded contributions to the tune of $40 billion in 2016 against the relentless backdrop of an increasing number of Boomers retiring (in 2014, there were 9.9 million receiving benefits).
Microcosm this demographic dynamic to the extreme example of Chicago. In 2015, the latest year for which we have full data, some $999 million was paid out to 29,296 recipients. That compares to the $90 million in investment income generated by the two employee pension funds that year. Back out the timeline a decade – in 2006, these two pensions held a combined $8.5 billion in assets. Since then the two funds have generated $3.1 billion in investment returns but paid out $8.511 billion to retirees.