A renewed rash of headlines around the country is thrusting the finger of blame at public pension plans for ongoing state and local government fiscal ills, from budget shortfalls to municipal bankruptcies. The apparent trigger for this latest bout of public pension pummeling is disappointing annual investment returns in 2011. Focusing narrowly on one small part of a very big picture makes it easy enough to demonize public pension plans once again. But it’s also misguided and irresponsible.
The truth is that while public pension detractors are busy making headlines, the plans themselves are busy making progress. Any responsible party who bothers to check the pulse of public plans will find their vital signs are strong and their prognosis is good.
One alarming report in a West Coast newspaper blamed the recent bankruptcies of California municipalities San Bernardino and Stockton, at least in part, on “high” public employee pay and “generous” retirement benefits. Extravagant government spending during the boom times — and a deeper bust than almost anywhere else, with some of the highest foreclosure rates in the nation — weren’t cited as possible contributing factors.
New Hampshire’s papers are raising public concern because the state retirement system saw a 0.7% return on investments in the fiscal year that ended on June 30. But the year before, it posted a 23% return — making for a very healthy two-year average that should not be overlooked.
And the news in Massachusetts is that state officials want to lower the state pension fund’s projected 8.25% annual return because, for the past decade, the fund’s average return has been 6.5%. But the fund’s average annual return since it was started in the mid-1980s is 9.5% — even factoring in a 29.5% drop caused by the Great Recession in 2008. Any reasonable observer will concede Massachusetts’ actual average annual return of 9.5% is significantly higher than its projected average return of 8.25%.
I am not suggesting that public pension plan policies, operations and investment experience are not legitimate subjects for public discussion. To the contrary — they deserve a much higher level of responsible, comprehensive review than they have been receiving. But fixating on one-year returns during a period that challenged all investors — because of the U.S. debt ceiling showdown, the ongoing European debt crisis and more — is anything but instructive.
National Conference on Public Employee Retirement Systems’ 2012 Membership Study shows the 147 state and local funds surveyed in April and May saw an average one-year investment return of 12.5% — down slightly from 2011’s 13.5%.
But longer-term investment returns — far better indicators of a plan’s health and sustainability — were all on the rise. Based on the fiscal year of each fund, in aggregate three-year returns jumped to 4.4% from -1%; five-year returns also grew to 4.4% from 3.6%; 10-year returns increased to 5.3% from 4%; and 20-year returns grew to 8.7% from 8%.
Participating funds reported a solid average funded level of 74.9%. In its 2011 report “Enhancing the Analysis of U.S. State and Local Government Pension Obligations,” Fitch Ratings considers a funded ratio of 70% or above to be adequate.
And the plans reported continuing structural and operational changes to ensure long-term sustainability.
What’s clear from the NCPERS study — the most comprehensive and up-to-date study of its kind — is that public pension funds are well managed, are continuing their robust recovery from the Great Recession, are solidly funded and are committed to long-term sustainability.
Even the State Budget Crisis Task Force, co-chaired by Paul A. Volcker and Richard Ravitch, former lieutenant governor of New York, in its verdict on the role public pensions are playing in state and local fiscal woes, correctly identified those governments’ failures to make required plan contributions as a primary cause of the current dilemma. Rather than pushing the panic button and recommending Draconian measures, the task force noted public pension plans can meet their obligations for the foreseeable future and recommended stronger local funding policies and greater disclosure as long-term remedies.
Regrettably, the ongoing attack on public pension systems continues to generate far more heat than light. Worse, it’s distracting policymakers from America’s real retirement security crisis, which needs to take center stage in our national policy debate.
Retirement security is not a luxury — it is a necessity. Younger workers now compete for scarce jobs with baby boomers who can’t retire because their 401(k) balances were gutted by the recession. Boomers forced to retire with insufficient assets won’t be contributing to the economy — they will likely become drains on public resources instead. A strong, sustainable economy demands that we manage our workforce. Older workers must be able to retire with financial security to make room for younger workers.
That’s why it’s crucial that we find ways to extend defined benefit pensions to private-sector workers. NCPERS’ proposal for a Secure Choice Pension — a public-private partnership to offer affordable, easy-to-administer pension plans to private-sector employers — would provide guaranteed, lifetime retirement income that is immune to market fluctuations and sudden, unexpected economic downturns, at no cost to taxpayers.
The SCP is an idea whose time is now. The SCP and similar proposals warrant the immediate and earnest attention of state and federal policymakers if America is to achieve long-term economic stability and deliver what it owes to its citizenry — retirement security for all.
Hank Kim is executive director and counsel of the National Conference on Public Employee Retirement Systems, Washington.