Pensions: Looking at the big picture

July 9, 2013

There is a lot of debate in muniland about how state and local governments should calculate pension liabilities. But I have not heard much discussion about the asset side of the pension story. It is a generally-accepted assumption that investment earnings are about 60 percent of the annual increase in pension funds. But what about the other 40 percent that represents the contributions made by governments and employees? We’re often told that state and local governments are under-funding their pensions. How much are they really contributing?

The U.S. Census collects this data about state and local government pension plans on a delayed basis. The most recent is for 2011. I thought it might be a good exercise to compare 2011 data with 2008 data. With the financial crash, 2008 was a tough year for public pensions.

The data shows everything moving in the right direction, including increased contributions made by governments and employees. In 2011, combined investment earnings and contributions of $616 billion far outstripped the pension payment outflow of $231 billion.

One point of data to note is the increase in employee contributions from $36 billion in 2008 to $40 billion in 2011. I was a little surprised that this number did not increase more, given the number of state and local governments that have increased the required employee contributions. However, full-time public employees decreased from 14.8 million in 2008 to 14.5 million in 2011. It’s worth monitoring this number going forward.

It would be good if the discussion of public pensions became a little more holistic. Focusing on the level of liabilities, which can resemble a voodoo science, is only part of the picture. Investment earnings and contributions need to get more attention.

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