Tuesday, December 9, 2008

Big Trouble for the New Jersey Pension Fund

As of late November, New Jersey's State Workers Pension Fund has lost more than $23 billion this year. That places the balance at $57.8 billion, down more than 28% from $80.8 billion at the beginning of the year.

The New Jersey State Workers Pension Fund covers 700,000 working and retired individuals. The New Jersey Investment Council, led by hedge fund manager Orin Kramer, establishes broad policy and asset allocations for the fund. The Division of Investments, led by former insurance industry executive Bill Clark, settles on specific investments and managers.

Up until a few years ago, the fund was run entirely by state workers and invested heavily in stocks. Like many other pension funds, it has since taken up the Harvard and Yale endowment model of investing. This means diversifying outside of the stock and bond asset classes and into real estate, commodities, hedge funds and private equity.

Let's do some math. Current retirees account for $5.2 billion of withdrawals from the fund per year. Current workers contributed $993 million to the fund last year. The State is supposed to contribute an additional $1.1 billion, but Governor Jon Corzine has asked to have this amount reduced to $559 million. If we use the $559 figure, the fund has a current annual deficit of $3.648 billion.

How bad is that? As of late November, the fund has to return 6.31% a year on its investments just to cover this deficit. Even if the state decides to contribute it's $1.1 billion contribution, the return has to reach 5.38%. What happens if the contributions of current workers and the state stay the same and the fund has no gains for 5 years (a very real possibility if we are in a 1970's style investment climate)? The fund would be down to $39.56 billion in assets and would have to return 9.22% on its investments just to cover the deficit.

All of this does not even take into account the inevitable demographic changes that will take place over the next few years as the mass of baby boomer workers set to retire. Actuaries estimate that the fund needs $118 billion today cover its long term obligations. This is a shortfall of $60.2 billion and it only looks to get worse.

If anyone has a breakdown of the number of currently retired workers that make up the 700,000 of fund stakeholders and how this changes over time, please email me.


Anonymous said...

You can thank former governers Whitman and Mcgreevy for not contributing funds all those years. The fund should have had a large surplus at that time so that with the recent drops we would be OK. Now it is too late.