On June 18, 2012, the Pew Center on the States released an update to their report, "The Widening Gap," which addresses state liabilities and costs for pensions and retiree health care benefits. The report asserts that States “continue to lose ground in their efforts to cover the long-term costs of their employees’ pensions and retiree health care,” and that in fiscal year 2010, states were $1.38 trillion short of having saved enough to pay their “retirement bills,” a nine percent increase from the year before, according to Pew.
However, the Pew report’s analysis uses old data that fails
to reflect recent market gains. As Keith
Brainard, NASRA’s Director of Research, points out, by relying on FY 2010 data,
“the dates the Pew study is using to measure the condition of many public
pension plans are near the low point of the recent investment market decline.”
Nearly one-half of plans in the NCTR/NASRA Public Fund Survey have an actuarial
valuation date that pre-dates their fiscal year-end date, usually by one year,
Keith notes.
Also, in order to arrive at the $1.38 trillion figure, Pew
once again combines pensions with retiree healthcare. As NCTR and NASRA have noted in the past, retiree
healthcare cost containment options, financing structures and benefit
protections are entirely different from those of pensions. Pew’s decision to couple retiree healthcare
with pension liabilities distracts from the issues States face with these very
different benefits.
Finally, as Pew itself notes, its report does not reflect
the many actions that States have taken in 2010 and 2011 to address plan
sustainability, including benefit cuts.
The condition of some states “may have improved because of those
reforms,” Pew concedes.
PensionDialog was quick to point out these flaws. In a June 20th post, Ady Dewey
stresses that the Pew report is nothing more than a snapshot in time, “a single
frame out of a feature film that runs for decades.” Is it any wonder that, using data from the
bottom of the market decline, public pension funding levels were lower, she
asks? “It’s also no surprise that states
had difficulty making their full pension contributions as revenues declined
sharply in 2009 and 2010,” she notes.
PensionDialog
suggests that another snapshot should be considered: according to the Federal Reserve, in the
first quarter of 2012, public pension plan assets rose to $3.1 trillion, which
is up from $2.8 trillion in the fourth quarter of 2011, taking assets above $3
trillion for the first time since 2008. Ms.
Dewey suggests that a report can be helpful as long as it is recognized for
what it reflects: a static moment in time. “When it comes to public pensions, a series of
multiple snapshots, taken with a long-range lens, is going to provide a more
accurate perspective of their condition and sustainability,” she concludes.
The National Institute on Retirement Security (NIRS) picked
up on the PensionDialog “snapshot” analogy a few days later. In a “Commentary” posted by Diane Oakley,
NIRS’ Executive Director, on June 22nd, she observes that “Flipping
through old photo album provides a view of where we have traveled, but it
certainly doesn’t tell us where we are today.” “The same can be said of the recent Pew Center
on the States ‘new’ report on public pension plans,” she asserts.
Ms. Oakley also notes the use of 2009 data and the failure
to reflect the changes that have been made in 41 states since then. In contrast to the Pew study, she references a
May, 2012, Boston College Center for Retirement Research (CRR) report that
finds, using moderate economic assumptions, that aggregate pension funding is
projected to cross over the 80 percent level in 2015, without taking into
account the pension reforms passed by the 41 states. “Fine tuning may still be needed, but we are
making progress,” Ms. Oakley points out.
“This is not reflected in the limited snapshot provided by the Pew study,”
she concludes.
The Pew report also garnered some attention from the media. However, not all coverage was negative with
regard to public pensions. For example,
an article by Mark Miller with Reuters notes the Pew report findings, but argues
that while pensions are consuming a larger share of some state and local
budgets -- and many plans also took major hits in the 2008 crash, with returns
since then hurt by low interest rates -- there are five things to keep in mind
about public sector pensions “before we continue swinging the axe.” According to Miller, these are:
1.
Pensions aren't simply a gift from taxpayers.
2.
Many workers don't get Social Security.
3.
Pension underfunding isn't as bad as you think.
4.
Pensions are more efficient than 401(k)s.
5.
The retirement crisis is real.
The Pew report also assesses each state’s management of its
pension and retiree health care obligations as of fiscal year 2010 based on
funding levels and contribution policies. States were rated as "solid
performer," "needs improvement," or "serious
concerns." Pew rated 11 states as
“solid performers” in managing their pension obligations in fiscal year 2010; 8
needed improvement; and the 32 remaining states, all of which were less than 80
percent funded according to Pew, were judged to be in the “serious concerns”
group.
DELAY CLAIMING SOCIAL SECURITY BENEFITS -- A SMART
IDEA?
Is waiting to claim your Social Security benefit in order to
obtain a higher monthly benefit at an older age -- using your savings in the
interim to pay current expenses – a good strategy? According to a new Issue brief from the
Center for Retirement Research (CRR) at Boston College, the answer is
essentially yes. Effectively “buying an
annuity” from Social Security -- the savings used is the “price” and the
increase in monthly benefits is the annuity it “buys” -- is especially
attractive in today’s low interest rate environment, according to the brief,
which finds that this Social Security option “presents an effective, and often
overlooked, drawdown strategy that households should seriously consider.”
Indeed, CRR says that it is “the best deal in town.”
Why? CRR gives
several reasons:
1.
When interest rates are low, as they are now, living
on interest income is “essentially impossible,” particularly when these rates
are less than the rate of inflation;
2.
Basing an income on a portfolio of stocks and
bonds is also not very practical since bond interest rates are low and “any
increase would reduce the value of the bonds retirees hold;” and
3.
Commercial annuities funded by bonds “also
provide much less income than they would in ‘nor-mal’ times.”
By contrast, the additional income available by delaying claiming
Social Security is not affected by current interest rates, CRR notes. Furthermore, the “annuity rates” for using
savings to delay claiming Social Security benefits are much higher than
drawdown rates from stock and bond portfolios, and uniformly higher than
current rates on commercial inflation-protected annuities.
Thus, CRR claims, the ability to “buy an annuity” from
Social Security at these rates “provides a critical safety net against the risk
of retiring when interest rates are low.”
It should also be noted, however, that a key limitation on the use of
Social Security as a source of retirement income is the inability to delay
claiming past age 70.
PUBLIC EMPLOYEES: IN THE NEWS AND UNDER THE GUN
As public employees continue to be
the focus of political maneuverings in many State capitols as well as in
Washington, DC, a new updated report from the Center on Budget and Policy
Priorities (CBPP) and a blog post by its author, Elizabeth McNichol – who spoke
at the 2011 NCTR Annual Convention – remind readers of “Five Important Facts about
Public Employees.”
1.
Elementary
and secondary education comprises — by far — the largest share of state and
local government employees.
2.
The public
workforce has grown only modestly as a share of the population over the last
three decades.
3.
Public-sector
workers earn less in wages than their private-sector counterparts.
4. Counting both
wages and benefits, public-sector workers on average still earn less than their
private-sector counterparts, though the gap is smaller.
5.
Labor costs
make up a significant share of state and local spending.
The CBPP is a well-respected
Washington think-tank founded in 1981 to analyze federal budget priorities,
with particular emphasis on the impact of various budget choices on low-income
Americans. It has been referred to by Congressional Quarterly Today as being “socially
liberal, fiscally conservative, and academically rigorous.”
The CBPP report, “Some Basic Facts on
State and Local Government Workers,” was updated on June 15, 2012. It contains key statistics about state and
local employees which are always good to have at hand.
Ms. McNichol is a Senior Fellow at
the CBPP. She is also the co-author,
along with Iris Lav, of a paper entitled “A Common-Sense Strategy for Fixing
State Pension Problems in Tough Economic Times,” issued by the CBPP in May of
2011, which argued that it would be “extremely difficult, as well as
unnecessary, for states to immediately begin fully funding their pension shortfalls.
State economies and budgets continue to
struggle because of shrunken revenues and rising needs. The long-term pension
shortfalls are not the cause of the current state fiscal problems, and
addressing them need not overwhelm state and local budgets now or reduce
states’ ability to recruit and retain a high-quality workforce.”
