What does the future hold for state and local government retirement plans and for the global economy? I can unhesitatingly and unequivocally say I don't know. Perhaps some of you will find it refreshing to see such an admission after reading the almost daily commentary from people around the nation claiming knowledge of the “truth” about these matters.
In fact, the buzzword du jour is “true,” and it is most commonly found in calls for “reform” (where reform means pay less in benefits and for a shorter period regardless of the current situation). I've seen references to the “true cost,” the “true liability,” the “true funded status,” “the true asset value,” and “the true earnings potential.” It makes me wonder what generated this epiphany that is apparently sweeping the nation and resulting in unprecedented levels of insight into the present and certainty about the future. Most often, “true” is being used to mean things are worse than current assessments of retirement plans' financial condition and positions based on existing industry standards. Interestingly enough, those who have suddenly been blessed with this newfound wisdom do not universally agree on what is true.
These claims and proposals, at least in my view, have been extreme to a fault. When the pendulum swings, it invariably swings too far. I'm actually surprised we have not seen a movement in support of pay-as-you-go financing, with the logic being that a plan with no assets can't lose anything when the markets falter.
While there are many crosscurrents at play, I think the following three drivers are at the heart of the quest for truth and certainty.
Short-term performance. It has been widely reported that while public funds rebounded considerably in fiscal year 2010, ended June 30, they have not recovered from the losses incurred in fiscal year 2009. Now there's a surprise. For the two-year period ended June 30, 2010, the Standard & Poor's 500 cumulatively lost about 16%. Despite very good performance relative to the equity markets, the average statewide public fund cumulatively lost about 8% during that period, apparently never to get back on track again, according to the naysayers.
Defined benefit envy. Private-sector 401(k) participants are angry about their recent losses coupled with having to pay increased taxes to support public-sector defined benefit plans. I contend that many of them have short memories. When the stock market was on a roll in the 1990s, private-sector employees displayed considerable interest in getting out of what they thought were stodgy old defined benefit plans and into plans that would allow them to control their own financial destinies and take advantage of the double-digit returns available from the market. It turns out they were not the wise investors they thought themselves to be. They would like back into defined benefit plans, but that door is now closed to them. They are angry and envious.
Misperceptions about benefit levels. Unfortunately, the public at large grossly overestimates the individual benefit amounts received by retired state and local government employees from their defined benefit plans. That misunderstanding is exacerbated by reports of isolated incidents, frequently reported as if they are the common condition.
For those who insist on claiming to know what is true, I offer the following:
Over the past 80 years, a plain-vanilla indexlike portfolio of 60% domestic stocks and 40% intermediate bonds, produced a return of 8% and price inflation over that same eight decades was 3.2%.
Retirement systems are in the risk management business — not the risk elimination business. Certain risks can be eliminated, but only at a huge cost.
Is it reasonable to re-examine plan benefit provision periodically? Absolutely.
Should plan provisions be radically altered as the result of what effectively happened over an eight-month period in the financial markets? That depends. In the minds of those who, for whatever reason, are advocates of the elimination of public-sector defined benefit plans, the answer is a clear and resounding yes. For those of us who are less certain about the future, it is a policy decision in search of a judgment call. For the sake of future generations, I hope that the judgments are sound and that, if surgery is called for, it will not be done with an ax, if a scalpel is what is dictated by the facts and circumstances.
Gary Findlay is executive director of the Missouri State Employees' Retirement System, Jefferson City.