The COVID-19 pandemic is clearly a bad thing, but were public pension plans at least getting healthier before this struck?
A few state pension funds were in the process of recovering from the Great Recession, but at the end of 2019 most were stagnated with a fragile funded status or worse. Out of the 143 statewide defined benefit plans, only 32 had a 90% funded ratio or better going into 2020.
It is not all bad news. What were the positive trends for public pensions over the past decade?
As a whole, pension funds greatly improved their commitment to paying required contributions between 2012 and 2019. After the Great Recession, some states were putting less than half of what they should into their pension funds, and on average states paid just 79% of their required contributions in 2010. By 2019, though states paid 96% of their required contributions, higher than any year since 2001.
What has been the most damaging trend for public pensions over the past decade?
State pension funds did not move fast enough to reduce their assumed rates of return. In the years following the Great Recession, states took only small steps to reduce the amount they were expecting from investments, which meant they didn’t increase their total contributions into pension funds fast enough. Eventually states did make meaningful steps to lower their investment assumptions, but not before unfunded liabilities increased.
Are pension benefits themselves the problem?
No. As states like South Dakota, Wisconsin, New York, and Tennessee have all demonstrated, it is possible to manage a public retirement system well, minimize risks, and keep costs stable. The problem for the rest of the country is political apathy toward unfunded liabilities, and the subsequent challenges that pension debt creates.
Could states and cities just hire more people to fix these problems?
Adding new people to a struggling pension fund is not going to be the magic solution. Those new people would bring additional contributions, but they would also mean additional promised benefits.
Exactly how are public pensions in a worse position than going into the Great Recession? It looks like public pensions have stronger returns now than 2008.
The Great Recession started in early 2008 and ran until the spring of 2009. Most pension funds measure their financial returns as of June 30th of each year, so by June 2008 pension fund were already in the midst of the Great Recession. The appropriate comparison is measuring how well funded statewide pension plans were in 2007 (the year before the Great Recession) and in 2019 (the year before the COVID Recession).
Is the trend toward more investment risk a bad thing?
For most states, the additional investment risks they have taken on over the past decade should be a concern. Sometimes shifting assets into a higher risk category — like private equity — can help diversify a pension fund’s assets, and avoid the risk of being too concentrated in one type of investment. But most pension funds doing that are only making the move to try and hit an unreasonably high assumed rate of return. So they are taking on the risk that they underperform, which would lead to unfunded liabilities.
Why does the data in “State of Pensions” start in 2001?
The vast majority of state governments have only made data publicly available starting from 2001, and we think it is important for the data in our study to reflect what states have reported for themselves. It also so happens that 2001 is the strongest year on record historically for public pension funded status, so that provides a good benchmark for states to aim at getting back to.