Friday, June 3, 2011

How Bad is the Pension Problem?

This article was published in U.S. News & World Report
 Well-publicized crises in Illinois and New Jersey may have given public pension systems a bad reputation, but in reality, the vast majority of state and local government programs are not on the verge of collapse.
"The public pension community is not in a state of crisis," says Keith Brainard, research director at the National Association of State Retirement Administrators. "Some plans face larger challenges than others, but it varies by plan." 

Overall, state public pension programs were nearly 78 percent funded in 2009, according to the Pew Center on the States. While that figure is down from 84 percent funded in 2008, experts say the decline isn't cause for panic. "Seventy-eight percent is a number we're very comfortable with," says Hank Kim, executive director at The National Conference on Public Employee Retirement Systems.

While the legacy of the Great Recession continues to weigh heavily on the financial affairs of state and local governments, public pensions programs have several factors aiding their recovery. Here are a few that experts say will eventually help put pension programs back in the black:

1. No "magic number."
An underfunded pension program can signal deeper systemic problems, but it doesn't mean the program is insolvent or unable to meet its obligations. On average, state pension plans are funded at 78 percent, which means they have enough assets and cash on hand to pay participants obligations up to 78 percent.
"There's nothing magical about being 100-percent funded," Kim says. "It's essentially like a mortgage. If you buy a house and pay 78 percent of that mortgage and have that 22 percent left, that's not a bad thing." 

2. Time.
Experts say that in general, pension plans have the luxury of time and compounding interest to recoup their losses. Pension funds were slammed during the recession, but markets have seen a lengthy recovery over the past couple of years, which has helped pension fund balance sheets.
The outlook is good," says Kil Huh, director of research at the Pew Center on the States. "We've seen strong market returns and that's good news for the states because it will help them get to a healthier level of funding over time. It's still going to take a number of years to get back to pre-recession levels, but they are on the way up." 

3. Structural changes.
The increasing number of baby boomers entering retirement has put additional pressure on pension programs, initiating discussion among lawmakers and pension administrators on how to adapt these plans to better align with changing budget constraints.
Pension plans have three streams of income: employee contributions, investment returns, and employer contributions (the state or local government entity). While investment returns have recovered somewhat in recent months, low tax receipts due to the recession have caused many plan sponsors to shortchange their contributions.

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