Puerto Rico's debt restructuring is pitting pension beneficiaries against bondholders, and based on recent news, it seems pensioners are going to come out ahead. While the commonwealth is a unique entity with debilitating fiscal issues, it has lessons for those states and municipalities with seriously underfunded pension plans. Pension benefits are well-protected by law and kicking the can down the road is not a solution. Now may be a good time to act to ensure these plans remain solvent.
In 1878, New York City began offering police officers a lifetime pension after 21 years of service and so was born the U.S. public pension system. Today, there are more than 5,500 state, county and local plans that play an essential role in protecting the retirements of public-sector workers. Calculating their aggregate liabilities is more art than science, but it's fair to say that their $4.5 trillion in assets represent less than 73 cents of every dollar they owe — some much better, some much worse.
Public pension benefits and contributions are heavily protected by law. So if pension systems are unable to pay promised benefits, the burden will fall on taxpayers. Paradoxically, taxpayers have almost no voice in public pension fund governance. There is a fundamental unfairness between generations if future taxpayers have to bear the burden of decisions made by their forebears.
Plenty of factors led us to where we are today. The impact of political decisions about the level of worker benefits was not fully appreciated by voters. Pensions were promised, but legislatures failed to provide the necessary funding. Demographics shifted. Investment returns failed to meet expectations — most dramatically during the global financial crisis, when public pension assets lost more than 34% of their value.
We studied the 25 largest pension plans — which together represent 55% of all U.S. public pension assets — to identify possible solutions.