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The weak financial condition of seven US public pension plans threatens to deplete their assets by 2028, leading to severe risks for the living standards of thousands of American employees and retired workers.

Many US public pension plans had not fully recovered from the 2007/08 financial crisis before coronavirus struck, triggering turmoil across financial markets. The correction in the US stock market has increased the long-term structural problems across the entire US public pension system, particularly for the weakest funds.

“Public plans with extremely low funded ratios in 2020 may face the risk of running out of assets in the foreseeable future if markets are slow to recover,” said Jean-Pierre Aubry of the Center for Retirement Research at Boston College, which carried out a detailed study on the plight of US public pensions.

More than 320,000 members of the New Jersey Teachers and Chicago Municipal public pension plans face the biggest risks as severe cash outflows are draining the assets of these two schemes.

A slow recovery for the US stock market could result in Chicago Municipal’s funded position falling from 21 per cent this year to just 3.6 per cent by 2025. This would leave assets to cover just three months of the fund’s retirement payments, according to CRR’s analysis.

New Jersey Teachers is also burning through cash, with its funded position projected to decline from 39.2 per cent to 23.2 per cent over the next five years. By that time, New Jersey Teachers would have assets to cover 19 months of retirement payments.

Mr Aubry did not expect any US public pension plan to run out of money over the next five years, but more severe problems could then emerge. If stock market weakness persists, the public pension plans of Kentucky and Providence along with Dallas Police and Fire, Charleston Fire and Chicago Police could all end up with less than three years of retirement benefit payments saved as assets. The Chicago Teachers fund, which is also bleeding cash, might have enough assets to cover a little more than three years of benefit payments.

Thomas Aaron, a senior credit officer at Moody’s, the rating agency, said that the unfunded liabilities of Chicago’s pension funds would continue to grow for more than a decade even if investment return targets were met.

“Chicago has particularly high pension risks. The city has built up very large unfunded liabilities through years of very weak pension contributions,” said Mr Aaron.

The crunch point of a plan running out of assets is known as the “depletion date”. After this point, a US plan would move to a so-called “pay-as-you-go” arrangement where retirement benefits are paid solely from contributions by employers and employees.

“Reaching an actual depletion date can have a severe impact on a state’s finances because a sudden transition to a pay-as-you-go plan may result in costs [benefit payments to retirees] that far exceed recent employer contributions,” said Les Richmond, an actuary at Build America Mutual, a New York-based bond insurer.

Mr Aubry noted that pay-as-you-go costs for both New Jersey Teachers and Chicago Municipal were more than 50 per cent higher than their contributions, emphasising the high costs that both states would face if assets in these vulnerable plans became exhausted.