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Face to face

Munnell brings scholarly approach to pension issues

Former Clinton administration official taps macroeconomic background to expand knowledge of public pension issues

Alicia H. Munnell got “hooked on big systems with lots of money” when she was pursuing her doctorate in economics at Harvard University and doing her graduate thesis on Social Security. From there she spent 20 years on macroeconomic issues, as director of research for the Federal Reserve Bank in Boston. Her scholarly approach and expertise led to an appointment with the Clinton administration as assistant secretary of Treasury for economic policy and as a member of the President's Council of Economic Advisers.

The allure of being a part of a White House team also brought the frustration of a vaguely defined job. “You're humbled just to walk through the White House,” said Ms. Munnell, “but on the other hand, I was there to reform the tax system and health care, and it's very hard to do anything. That's the good thing and the bad thing.” That frustration sent her back to Boston in 1997 as the Peter F. Drucker Professor of Management Sciences at Boston College's Carroll School of Management. There, an opportunity to start the Center for Retirement Research soon presented itself, and she found herself writing her first grant application for what seemed at the time the large sum of $5 million. Since then, the center's support has expanded significantly, along with its research on employer-sponsored pension plans in both the private and public sectors. “It's a topic that a lot of people are interested in, fortunately,” said Ms. Munnell.

In the early 2000s, Ms. Munnell wrote extensively about the private sector's transition from traditional defined benefit pension programs to 401(k) plans. In recent years, she has turned her attention to state and local government pension plans. In addition to her latest book that came out this fall from Brookings Institution Press, “State and Local Pensions: What Now?” she co-authored “Working Longer: The Solution to the Retirement Income Challenge” in 2008 and “Coming Up Short: The Challenge of 401(k) Plans” in 2004.

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Alicia H. Munnell

  • Current position: Director, Center for Retirement Research at Boston College; Peter F. Drucker Professor of Management Sciences, Carroll School of Management
  • Age: 69
  • Education: Bachelor's degree in economics from Wellesley College; master's degree in economics from Boston University; Ph.D. in economics from Harvard University
  • Interests: travel, skiing, duplicate bridge
  • Family: two sons, four grandchildren

“I love what I do now,” she says. “The idea of learning everything is so satisfying.”

When did your fascination with public pension plans begin? In the late 1970s, I was a member of the Massachusetts Retirement Law Commission. There were no funding schedules (for the Massachusetts retirement systems); the chairman was investing the assets and he ended up in jail. It was the Wild West. You don't know the half of it.

We had started the Center (for Retirement Research) in 1998, and the Center for State and Local Government Excellence and ICMA-RC talked to us in 2006 about creating the state and local project, and we were up and running by 2007. It seemed again like big pots of money. We were learning as went along.

The first survey of state and local plans in 1978, gave them a “D.” What grade would you give them now, and why? They deserved it. (Now) I'd say “B” range, but the thing I learned from the various plans is that heterogeneity is the keyword. You have Delaware on the one hand, and then there's Illinois, which hasn't done anything right. It's the culture.

In your latest book, you thanked a lot of people who shared their perspectives. Is there more or less consensus today on the challenges and solutions? I'm not that big a player, but once you move away from interest rates and unions, I think everybody simmers down and you can have a conversation. I think people are well-intentioned.

My sense is that public-sector people take the funding level quite seriously. I think they will go back to funding their plans. Rhode Island looked impossible, but they had an open debate that involved everybody. I think Rhode Island is a very good model for plans in bad shape. I have no idea what the answer is for Illinois.

The key aspect is, you're not going to get any solutions if you belittle the public employee.

Are public pension benefits too generous? I don't think you can look at pensions alone. It's just one portion of compensation. When you look at private-sector benchmarks, the work we've done shows that it turns out roughly equal (to the public sector). I am equally concerned about some states hacking away (on benefits). You have to believe that you get what you pay for. (If you cut too much) you're not going to have good people to teach in your schools, to police your streets, to run your towns. The tendency is to want to just cut and the whole conversation has been about pensions; there is not enough conversation about how much compensation package do we need.

What role do defined contribution plans play in solving public plan funding problems? Where do you see them in the public realm 10 years from now? Some DC component makes sense, both to balance the risk and to make sure employees (who don't vest) get something out of these plans. I don't see any need for doing away completely with DB. I think people argue for DC plans for the wrong reason: to solve financial problems. It doesn't have any impact on the current liability.

I think sole reliance on a DB plan doesn't produce a good outcome for workers, and when things go wrong, the full burden is borne by the taxpayers.

Ten years from now, we'll see more hybrid plans and, hopefully, the public sector can learn from the 401(k) experience in the private sector.

Are the current public plan funding problems more due to financial crises or management issues? How much can investment strategy solve the problems? If you have two financial crises within a decade, that seriously undermines anything you can do. That's pushed these plans into the headlines.

Some people say I'm too soft on the plans, but my view is that for most of these plans, if we don't have a financial crisis, they are going to muddle through.

You argue that one of the three biggest challenges for public pension funds is moving portfolios from risky assets, particularly equities. Is there a proper asset allocation? I think equities have a role in public plans. ... My sense is that risk assets are too high. I don't know what the right number is, but I wouldn't be worried about it if (risk assets) was around 50%. The key is, you really need to keep the money in good times. If you're always giving away the money when times are good by increasing benefits, you could be in trouble later.

What is the right assumed rate of return for public plans? The assumed rate of return question is such a complicated one. I find it annoying that my fellow economists stood up and said "we know what went wrong.' Some of the same ones gave (troubled public plans) an “A” rating. It got very politicized, with some people blaming the power of unions. We couldn't find that.

The right rate to use is a rate that reflects the plan's situation. There are huge implications if you ask them to change on a dime.

There is a slow movement toward (rates of return in the 7% range). The pain (of lowering rates, which causes funding levels to drop) is it makes you look like you're doing a terrible job.

How do the new Governmental Accounting Standards Board rules change things? I think the GASB changes are absolutely terrible. It's almost unintelligible, with blended rates, for example, and removing the ARC (annual required contribution). It's really so important to see if plans are contributing. It's going to be a lot harder to figure out.

My hope is not that much is going to change.

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This article originally appeared in the December 10, 2012 print issue as, "Scholarly approach".