False alarms distract from real retirement challenges

The United States is confronting a number of economic challenges – turbulent markets, rising interest rates, high inflation, and growing economic inequality. Despite these challenges, public pension plans in the U.S. have remained resilient in recent years. In fact, many plans achieved double digit investment returns during 2021. And while the markets took back some of those gains during 2022, many plans remain at their highest funded levels in years, even with more conservative investment return assumptions.

The strength and resiliency of these retirement plans can be attributed, at least in part, to the implementation of changes stemming from lessons learned following the Great Recession. Yet, misinformation continues about the financial health of these retirement plans that provide economic security for state and local government workers like first responders and teachers.

For example, a recent MarketWatch column focused on alarmist research about the liabilities of public pension plans. The research wrongly asserts that public pension plans should use a so-called “risk-free” discount rate to calculate their liabilities, which is misleading and inflates pension liabilities. Moreover, the column uses this misleading number to calculate a deceptive per-person pension liability, which in no way reflects reality.

Pensions are complex, and most Americans and policymakers don’t have the time to develop a deep understanding of how public pensions are funded, invest assets, and pay benefits to some 11 million retirees and their beneficiaries. Unfortunately, this complexity makes it easy to hype misleading numbers that have little basis in reality.

Let’s set the record straight

First, there is no national “liability” for state and local government pension plans. Public pension plans in the U.S. are sponsored by a state or local government that provides retirement benefits to its workers. The liabilities of those plans rest solely with the sponsor of that individual plan, which could be a city, county, or state government. Taxpayers in Texas bear no responsibility for public pension liabilities in California and vice versa. Nor does the federal government bear any financial responsibility for public pension plans.

Second, except for a few outlier plans that were shorted of contributions, public pension plans remain healthy and are built to last. Public pensions are long-term investors that have proven they can weather the ups and downs of financial markets, even a major market downturn like the Great Recession. In fact, recent research from the global financial services firm Lazard, the international benefits company Segal, and the National Institute on Retirement Security examined the experiences of public plans following the Great Recession. This research found that state and local pensions on the whole successfully navigated the 2007 to 2009 Global Financial Crisis (GFC). Like all investors, public plans experienced large investment losses during the GFC, but most plans had recovered their pre-recession asset levels within six years and have continued to build more resources. Unlike far too many individual investors, public plans did not panic sell at a major loss during the Great Recession.

Third, current pension funding practices are designed to be realistic – not to produce asset levels that are nowhere near the inflated liabilities created by using unrealistic “risk-free” discount rate assumptions. Each public plan carefully develops a realistic funding target based on plan-specific analyses through consultation among trustees, plan staff, actuaries, and investment professionals. Using an unrealistic funding target misallocates costs over time and ends up a gross misuse of taxpayer and employee dollars that can be used to meet other vital needs today.

Finally, nearly every state and local retirement system made changes in the years after the recession to further strengthen the plans for future market downturns. Public plans remain, on average, nearly 80 percent funded after implementing many changes that resulted in increasing their funding targets by roughly 20 percent.

Pensions plans have implemented changes to strengthen long-term sustainability

The changes that have been implemented by public retirement systems since the Great Recession include assuming lower future investment returns, adopting mortality assumptions that incorporate future mortality improvements into the calculations (which was not possible in decades past), and implementing funding rules that pay down debts more quickly.

Everyone benefits from the fact that contributions made to public plans are, on the whole, adequate to pay off obligations over a reasonable time. These changes were not easy, especially for public workers who sacrificed more than their fair share toward more conservative funding approaches often through smaller wage increases or absorbing greater workloads. And, the change in assumptions is a major reason that costs have remained higher in recent years.

During the years when there was discussion that plans should assume a three percent future investment return, plans continued to deliver strong returns that were on par with past experience. Callan research shows that plans generally have met or exceeded their investment return targets over time. This makes any arguments about using a 1.6 percent return assumption over the next 50 or 70 years even more nonsensical, especially now that the 10-Year High Quality Market (HQM) Corporate Bond Spot Rate is 5.83 percent.

Looking ahead, let’s focus on ensuring everyone has a retirement plan

The years immediately following the Great Recession were anxious and frightening times for many, rightly worried about the future direction of the U.S. and global economies. But throughout the crisis, our nation’s retired public servants, including educators, fire fighters, and nurses, never had to worry about receiving their retirement income. And in the years since the recession, pension plans across the nation have been diligent about making changes and evolving best practices to strengthen themselves for the future, all while paying $3.8 trillion in benefits between 2007 and 2021.

Of course, retirement plans should continue to improve when possible. But there were many extraordinary claims and predictions made about public plans in the aftermath of the Great Recession — plans would run out of money, states and cities across the country would go bankrupt, and retirees would not receive their pensions. We now have the benefit of hindsight, so we now know those claims were either greatly exaggerated or completely wrong. Moreover, public plans have more than doubled their assets since 2009 to nearly $6 trillion while paying out $3.8 trillion in benefits.

Rather than focusing on misinformation and false alarms about public pension plans, it’s my hope that we can focus more attention on the millions of Americans who lack retirement plans and face a grim financial outlook in their elder years.