Pension Dialog
The following post can be found in original form here.
The word “crisis” is getting a lot of airtime – but it is not related to the debt crisis, the obesity crisis, the healthcare crisis, the infrastructure crisis, or even the education crisis.
There is a public pension crisis, declared stories in the Wall Street Journal, on NPR, in Pensions & Investments, and an editorial in The Washington Times.
While Time did not use the word, it expressed the sentiment:
If [defined benefit] plans run short of money, they not only leave retirees unsure that their benefits are safe, they also create a potential cost for whoever has to bail them out (often taxpayers). Such plans can slide along for years hiding their growing internal deficits with accounting tricks. But at some point, the funding gap becomes too big to disguise – which is what is happening now.
The word “crisis” was also used by Illinois Policy Institute: “Without a doubt, state pension systems across the country are in a state of crisis.”
There’s no telling just what the IPI means when it says, “across the country.” There are more than 200 state retirement systems, and some could be considered to be in crisis. But if the IPI means that most state pension systems are in a state of crisis, that simply is not so.
The argument for a “crisis” hangs entirely on the ability of the entity that sponsors the plan—the state, the city, the school district—to make required contributions to the plan, i.e., to fund promised benefits. Arguing that the only option to make-up funding levels is increased employer/taxpayer contributions is disingenuous, as is implying that all liabilities are due and payable right away.
While pension funds were experiencing sharp losses in the value of their assets during the market decline of 2008-09, the Great Recession was also decimating state revenues, a decline from which states just now are beginning to recover to pre-recession levels.
This makes the public pension problem in most places less a crisis than a recovery – a recovery in which—notwithstanding the assertions of some opponents of public pensions—no state has or will seek a bailout of its pension fund from the federal government.
As for municipal bankruptcies, the International City/County Management Association reports that the panic over this becoming an alarming trend is unwarranted:
The trends that data show are that housing foreclosures, declining tax bases, and declining state pass-through revenues have negatively impacted the fiscal condition of some local governments. Local governments have also suffered from a lower rate of return on the investments that fund retiree pensions. Most local governments that face these fiscal stresses find they can manage their difficulties with conservative management and budgeting practices.
The California Public Employees’ Retirement System (CalPERS) recently pointed out the following regarding recent municipal bankruptcies in California:
Fiscal challenges facing cities and counties are difficult, but pensions are only a portion of much larger problems including the economy and housing market, and financial decisions made by city officials. The City of Stockton borrowed heavily to build a new city hall, a sports and entertainment facility, baseball park and marina. San Bernardino lost major employers and both cities are among the top five housing foreclosure cities in the nation, resulting in high unemployment and reduced consumer spending and sales taxes. … Stockton’s pension costs are only about 6 percent of the total city budget. In San Bernardino, pension costs account for 10 percent of the total city budget. Public pensions should not be the scapegoat for city bankruptcy woes, but are an easy target as officials look to deflect attention from decisions they made in guiding their cities.
This message is reinforced in a new book, State and Local Pensions: What Now? by Alicia H. Munnell of the Center for Retirement Research at Boston College:
Pension funding is simply a story of fiscal discipline – developing a reasonable plan and sticking to it.
In its Tenth Annual Public Pension Funding Review, Loop Capital Markets last month said:
Despite the continued clamor, our view remains fundamentally the same as last year; the public pension plan problem is state specific, and not systemic in nature; the pace of improvement across the states is uneven, with some states making little or no progress while others advance; [and] each state has its own unique path to recovery.
Despite the facts, despite the multitude of reforms nearly every state has enacted such as benefit cuts, higher worker contributions, or both, the mantra that public pensions are in a crisis seems to stick.
However, the crisis is not within the public sector but for the rest of us. That is what the stories should be examining: what will happen to the U.S. economy with so many unable to support themselves financially upon retirement or without adequate healthcare? It is a certain debt crisis, healthcare crisis, and retirement crisis all rolled into one.
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