Reason Foundation

Reason Foundation

Sensationalizing Pension Reform Puts Politics Ahead of Responsible Policymaking

Sal Rodriguez
October 11, 2013, 9:00am

Facing increasing pension costs, trillions of dollars in unfunded liabilities, and the possibility that pension systems may become insolvent, state and local governments are looking for fair and reasonable ways of controlling costs while also ensuring that promises made to public employees can be kept.  In recent weeks, pension reform has come under attack by progressive and union-backed journalists and advocates who argue that any effort to reform public employee pension systems are an act of “war” against working people. Sensationalizing pension reform as an assault on “teachers, firefighters and cops,” Rolling Stone’s Matt Taibbi, among others, has misguidedly defended a status quo that is neither affordable nor sustainable.

While making promises of annual pensions to millions of public employees, state and local governments acknowledge being over $1 trillion short of fully funding those promises. Worse, market-based accounting standards and estimates suggest long-term unfunded liabilities may be substantially higher than what governments would like to acknowledge.

There are a number of reasons for these shortfalls. For example, public pensions are funded through a combination of employee and employer contributions and investments of these pension funds. In setting contribution rates, pension systems rely on notoriously high long-term investment returns to establish an estimate of assets. Whereas economists generally recommend 30-year investment returns of 5%, pension plans often assume returns of 7.5-8.25%. Using these high investment assumptions, pension systems have not only set lower than necessary contribution rates, but have generally fallen far short of the assumed investment rate.

As a consequence, pension systems have found themselves with far fewer assets than assumed.

As a sample of nationwide surveys of unfunded liabilities:

However you review the numbers, the unfunded liabilities state and local government have yet to deal with, are massive. Despite this, systems have been slow to adjust their optimistic investment returns, as doing so would yield lower asset assumptions, and therefore require more contributions by employees and employers. In other words, assuming that the systems would earn less than the assumed 8%, thirty years out, requires governments to allocate more of their budgets to make up for the shortfall and/or employees taking home smaller paychecks as more of their salary goes towards funding their pension plans.

As there are only so many ways to address these realities, over the past decade, state and local governments have had to set aside increasing portions of their budgets in order to make up for investment or contribution shortfalls, especially as more employees approach retirement age.

For example:

There are only so many ways that fulfilling pension obligations while addressing the unfunded liability can be achieved. Raising taxes is one way of addressing the problem, though hardly a popular or prudent use of taxation authority. Undoubtedly, governments have had to cut services that taxpayers have come to expect or rely on in order to make room in limited budgets for pension payments. Either way, these two options come at the expense of taxpayers, who increasingly find themselves giving up more of their incomes while getting less for it.

With more realistic investment return assumptions, one can only imagine how many more tax dollars that could have been used for public safety or infrastructure (or, left in the hands of those who earned them) will instead have to go towards sustaining increasingly expensive pension systems.

As the fate of Detroit has shown, failing to control government spending (and particularly pensions) imperils those who were led to believe that everything was fine, that the government had everything under control. When AlterNet’s Lynn Parramore argues that the “unfunded liability crisis” is a “fiction,” she is contributing to a false and devastatingly harmful narrative that simply misleads those she presumably thinks she’s speaking on behalf of.

In question isn’t whether or not public employees ought to receive retirement benefits, but rather, how best to ensure that the promises made to them are kept, while also being fair to taxpayers and preventing systemic collapse. While it may not seem “fair” to reduce cost of living adjustments, scale back promises of 90-100% of final salary upon retirement, or tying retirement benefits to actual contributions to those who were initially promised such lavish benefits, it is difficult to imagine anything less fair than receiving nothing because the entire system collapsed.

Different jurisdictions face different problems in the short- and long-term. Having discussions about what types of pension reform may be needed to reign in costs and ensure solvency, hardly indicative of a "war" against working people, is responsible governance.

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