Thursday, June 28, 2012

New PEW Report Relies on FY 2010 Data, Presents Flawed Picture of Current State of Public Pensions

New PEW Report Relies on FY 2010 Data, Presents Flawed Picture of Current State of Public Pensions
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.

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.   
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.”

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