While many state and local governments see full funding as the key to the fiscal sustainability of their pension funds, a new brief from the Center of Retirement Research at Boston College suggests an alternative path.
In the brief — The Sustainability of State & Local Pensions: A Public Finance Approach — author Louise Sheiner suggests stabilizing pension debt as a share of the economy.
To assess the feasibility of the approach, Ms. Sheiner projected the future annual flow of benefit payments of a sample of 40 state and local pension funds — the 20 largest public pension funds plus 20 others selected to match the CRR Public Plans Database's national sample in terms of funding, budgetary and demographic characteristics, and then estimated the contribution increase necessary to stabilize the ratio of pension debt to the economy.
Utilizing data from 2017 fiscal year annual statements from the pension funds, Ms. Sheiner projected that the ratio of beneficiaries to current workers in state and local governments will rise about 36% between 2017 and 2040 and then mostly stabilize. Despite that rising ratio, annual benefit payments as a share of the economy are already near their peak. This is because most pension funds do not completely index their retiree benefits for inflation, and because many pension funds have gradually been making changes to benefits such as raising retirement ages. The reduced growth in average future benefits for current workers mostly offsets the increase in the beneficiary/worker ratio, according to Ms. Sheiner.
There is considerable variation in pension fund health across state and local governments, but Ms. Sheiner in simulating various scenarios shows that the majority of pension funds are not likely to exhaust their assets within the next two decades. Under a highly pessimistic return scenario of an annualized 0.5% over the next 30 years, plans would have to increase contributions by 14.7% to get the ratio of pension debt to gross domestic product to a level seen today, while contributions would need to increase 47.2% during that same period to achieve 100% funding. A less pessimistic, but still fairly conservative, annualized return of 4.5% over the next 30 years could see pension funds afford contributing 3% less and still achieving today's pension debt/GDP ratio. Under the scenario of full 100% funding, plans would need to contribute 14.7% more.
These contribution increases are roughly equal to those adopted by pension funds over the past 20 years, Ms. Sheiner said.
Ms. Sheiner is the Robert S. Kerr senior fellow in economic studies and policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. She could not be immediately reached for further information.
The brief is available on the Center for Retirement Research's website.
