Today, nearly all state and local pension plans are unfunded. According to the Public Fund Survey, “of 126 state and local pension plans, which account for about 85 percent of pension assets and participants in state and local pension plans in the United States, those plans held roughly $2.6 trillion in financial assets in 2009 but had about $3.3 trillion in liabilities for future pension payments”. So, there was a gap of almost $1 trillion in assets that were not able to cover the liabilities owed out to the pension holders. In a separate study by the Stanford Institute for Economic Policy Research found that in 2014, the unfunded pension liabilities is up to $4.833 trillion in debt.
This is an alarming amount of pension liabilities being unfunded at state and local levels. With pension liability debt increasing, state and local government must account for more of their budget use to go towards pension funding. Andrew Biggs, writer for the American Enterprise Institute, argues that the actual state and local government spending would be over 20 percent of their total budget. This was a big critique of the National Association of State Retirement Administrators (NASRA), who stated this number to be only 4.1 percent of the total budget. The NASRA fails to account for governments making their full contribution amount to pensions, and fail to count in the corporations and industries that are using the defined benefits (DB) method of pension funding (which is an agreed upon lump sum payment based on length of work history). With these numbers being understated, it seems at first that this debt does not cost governments much. However, this is far from the truth. Biggs goes on to show how out of the 160 pension plans, for which data was provided by the Public Plans Database (PPD), that in 2013, only 57 received 100 percent or more contribution. This is huge, because the NASRA defines pension plans being “well-funded” if at least 95 percent contribution was made to show good faith effort in funding. To me that seems to be very misleading on paper, and does not paint the real picture of what is going on to our state and local government budgets.
A good example of an industry impacted from underfunded pension liabilities, is teachers. The National Council on Teacher Quality states that, “in 2014, total unfunded teacher pension liabilities were $499 billion. Across the states, an average of 70 cents of every dollar contributed to state teacher pension systems goes toward paying off the ever-increasing pension debt, not to future teacher benefits”. This raises concerns to is it even worth it to sacrifice the salary of becoming a teacher for the benefits you are supposed to receive, but may not ever be able to one day. With that debt growing by roughly $100 billion each year, some new reform will be necessary to save the pensions. Some states are in deep debt, such as Illinois, that have unfunded liabilities of $55 billion, which accrues to a debt that is roughly equal to $27,000 for every student in its school system. Alaska is just as bad with debt roughly equaling $25,000, and the national average burden is about $10, 400 per student. Since 2008, what the NASRA defined as “well-funded”, for state unfunded teacher pension liabilities has dropped from 14 states being “well-funded”, down to only 9. The sense of security in those states struggling to fund their pension programs, is leading to highly qualified teachers to look elsewhere for work, where their retirement is more secure.
So, why do these numbers continue to grow? There are several answers to this question. Through the period of 2009-2013, investment was on the rise, and the assets to back these pensions have rose as well. The unfunded liabilities still grow due to the inability to hit their median target return numbers for state pensions of 7.5 percent, but were coming in lower at a median of 3.5 percent. To accompany this, market interest was falling, which raised the cost of returning on public pension funds.
Their does not seem to be a clear solution to solving this debt growth of the unfunded liabilities. New reforms are needed to provide some sort of payment bailout, although I believe an actual government bailout would just allow for the system to worsen again. Tax payers are the main group to worry about this situation, due to state and local governments possibly increasing taxes in states that have higher levels of unfunded pension debt. With debt increasing, states need to refocus their budgeting plans, which long term could lower investment by creating uncertainty issues. Losers in this situation would be the labor force, who may not find work, or discouraged to work since the labor market average age is getting older. However, a possible solution to those who are on a pension based retirement, should seek to get a Defined Contribution instead of a Defined Benefit, because the company is required each year to set aside a certain amount or percentage of money. This will at least guarantee that a worker will have money to fall back on upon retiring, but still does not solve the government’s unfunded pension liabilities debt problem.