Understanding the public pension funding gap
This is a guest post by Gregory Mennis, director of state public-sector retirement systems for The Pew Charitable Trusts. It is a response to “Late to the public pension game,” from April 2.
The Pew Charitable Trusts has been reporting on state and local pension data since 2007 and we applaud Reuters’ attention to this important public policy issue. Cate Long’s April 2 blog post “Late to the Public Pension Game” questioned why our report, “The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow,” relied on 2012 data, saying it was out of date. These key points explain why Pew’s latest report relies on 2012 data.
Pew has consistently used the states’ own numbers for all of its analysis, and 2012 is the most recent year for which data for all 50 states is available. Comprehensive data for 2013 won’t be available until later this year. Cate Long’s post cites a Wilshire Consulting report that fills in the gaps of the 2013 state data with Wilshire’s own estimates and projections. Wilshire also calculated states’ plan assets on a market-value basis, rather than using the numbers as reported by state pension plans. Our practice is not to modify, alter, or project data forward.
While the Wilshire report demonstrates that funding is improving on a market-value basis, a number of research groups and economists also believe the funding gap is even greater than our report’s analysis. We believe that using states’ own numbers and being consistent and transparent in our approach allows people using our data to be confident that the pension debt facing states is accurately reported.
The 2012 data allows us to provide information about states’ individual plans. Some states have close to 100 percent of the assets needed to pay for pension promises. They’ve also regularly made the full actuarial-recommended contributions. This demonstrates that pensions can be managed so that they are affordable and sustainable. But several states have set aside less than half of what is needed to pay for pension obligations, and many are falling short on contributions—with two states averaging only 34 percent of recommended amounts over the past three years. Wilshire and the Federal Reserve, which were cited in the blog post, only provide aggregate figures and do not report on individual states’ records in following responsible funding practices, as our report does.
Most state pension plans smooth out investment gains and losses over time to mitigate having reported funding levels swing based on investment market performance. Because of this, states did not report the full extent of the 2009 losses in their 2009 data—and these losses are still being recognized—and so the full gains for 2013 will not be reflected in the 2013 data.
There is another significant point that deserved more attention in the post: All of the reports point to a similar result – approximately one-quarter of pension promises to workers, equal to over $1 trillion, are not currently funded. As we note in our analysis, many states have implemented reforms, and if investment returns meet expectations and states make their contributions, we can expect to see a narrowing of the funding gap. But the data in our report also show that there are great differences in the level of funding and fiscal commitment across states. These distinctions are important to recognize at a time when more than $4 trillion in pension promises and the retirement security of 28 million current and former state and local workers are at stake.
There is no one-size-fits-all solution. Every state and municipality has a unique set of policy preferences and budgetary challenges. But all public employees – past, present and future – deserve a secure retirement. In states that are lagging behind in meeting their commitments, lawmakers should develop a fair set of solutions that will offer retirement security to public workers, protect taxpayers and maintain the state’s ability to recruit new employees and deliver important public services.