A recently released report by the Society of Actuaries on pension plan contribution indices shows a disturbing trend of U.S. governments significantly underfunding public employee retirement plans. The report studied 160 state and large city public sector pension plans from 2006 to 2014 using contribution indices, which are metrics that compare pension plan contributions to benchmarks that represent the contribution level needed to pay down unfunded liabilities. According to the report:
- For 130 plans, total unfunded liabilities (as reported by Government Accounting Standards Board guidelines) increased by approximately 150 percent, from $400 billion in 2006 to $1 trillion in 2014, while liabilities increased 47 percent, from $2.5 trillion to $3.7 trillion.
- While employer contributions for the same 130 plans increased 76 percent, from $48 billion in 2006 to $85 billion in 2014, most of the 160 plans still received insufficient employer contributions to maintain their unfunded liabilities.
When this happens, it’s typically taxpayers who pay the price of the debt through reduced or cut government services (i.e., in Chicago 89 cents of every new dollar for education has gone to teachers’ unfunded pension costs since 2009) and in worst case scenarios, public employees and retirees pay with reduced or cut retirement benefits. Just take a look at what’s happened in Prichard, Ala., Central Falls, R.I., and Loyalton, Calif., when the wells ran dry and governments could no longer pay pension benefits. All could have been avoided if money had been set aside to cover obligations instead of running up unfunded liabilities.
The Retirement Security Initiative believes that state and local governments should fully fund employee benefits so that all retirees and employees get paid what they have earned. Lawmakers have an obligation to ensure that their retirement plans are sustainable and fiscally sound and unfunded liabilities should be paid down over a reasonable time period.
Michigan is a great example of what happens when lawmakers take responsibility and reform their pension plans. Just last month, Michigan passed significant legislation that transforms the structure of the state’s teachers pensions from a defined benefit plan to a defined contribution model, while employing a mechanism that will prevent the future accumulation of unlimited pension debt, thus allowing lawmakers to pay down the state’s $29 billion pension debt over time.
All workers deserve safe and secure retirements and plans should place employees on a path to a secure retirement, regardless of tenure. And it all starts with governments fully funding their pension plans.