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Pension Funds

NCPERS: Trying to close or freeze underfunded pension plans is misguided

Policymakers exerting pressure to close or freeze U.S. public pension plans because their funding ratios are less than 100% are misguided, argues the National Conference on Public Employee Retirement Systems in a study in the November edition of the trade association's monthly research newsletter.

U.S. public pension plans for roughly the past quarter-century consistently have met their benefit and other obligations, NCPERS states in the study, which used U.S. Census Bureau data from 1993 through 2016.

During that period, obligations surpassed the combination of contributions and investment earnings only four times, in 2002, 2008, 2009 and 2012. The study argues the other 20 years of the period were more than successful in allowing funds to weather periods after severe economic downturns such as the financial crisis of 2008.

The study, "Don't Dismantle Public Pensions Because They Aren't 100 Percent Funded," stated "full funding of public pensions (to 100%) is not only a misguided goal but a waste of taxpayer money."

Hank H. Kim, executive director and counsel of NCPERS, said in a news release announcing the study that the results show efforts to close and freeze public pension plans citing underfunding are unfounded.

"Our analysis demonstrates that pension plans can tolerate ups and downs in the market and still meet their current obligations," Mr. Kim said in the news release. "While funding ratios are an important actuarial tool, they are not a proxy for a plan's ability to pay benefits here and now."

The study cites Census Bureau data that the majority of state pension plans were more than 70% funded in 2016, the most recent year for which data were available, and looks at the ability to pay annual benefit obligations of the four states with the lowest funding ratios — Illinois (46.04%), Kentucky (46.18%), New Jersey (48.06%) and Connecticut (48.15%) — compared to the four states with the highest funding ratios — Wisconsin (99.67%), South Dakota (97.22%), Tennessee (95.74%) and New York (94.1%).

The study said the lowest-funded states still had more than enough cushion to pay their annual benefits. For lowest-funded Illinois, from 1993 through 2016, the state experienced five years for which it had combined investment income and contributions that were lower than obligations and in 2016 it still had a cushion of $107.3 billion and total assets of $155.82 billion. Wisconsin, the state with the highest ratio, experienced lower combined investment income and contributions than obligations eight times in the period, and had a cushion of $52.81 billion with $98.15 billion in total assets.

The NCPERS study stated that "the results show that there is no significant difference between the bottom-funded state and local pension plans in terms of the plans' ability to meet their benefit obligations."

Mr. Kim said in the news release, "Shutting down a pension plan because it is not fully funded is like turning in the keys to your home because you can't pay off the entire mortgage balance this month."

The study is available on NCPERS' website.