Conning Study

The Center for Retirement Research at Boston College (CRR) released a report this month on Connecticut’s State Employees Retirement System (SERS) and Teachers’ Retirement System (TRS) pursuant to a grant from the State of Connecticut which included an amazing academic justification for shirking contributions that other states may jump on.

CRR outlines one of the the problems with the Connecticut plans:

Both systems have promised benefits to their members since 1939. But the benefits provided by SERS and TRS were not pre-funded until 1971 and 1982, respectively. Until then, benefits were paid each year from the State’s general revenues. The many years of unfunded benefits accrued over that period saddled both systems with unfunded liabilities that today account for nearly $9.3 billion of the combined $26 billion unfunded liability. The remaining portion of the unfunded liability comes from funding shortfalls – due to inadequate contributions, low investment returns relative to expectations, and negative actuarial experience – after the start dates.

and proposes to:

separately finance – over a long time horizon – the liabilities associated with members hired prior to the pre-funding.

using this silly rationalization:

The two main policy arguments for separately financing the liabilities are intergenerational equity and the perception of benefit costs for current employees. First is intergenerational equity. The majority of members hired prior to pre-funding are now retirees. The unfunded liabilities associated with them were accumulated over multiple generations and the services these members provide are no longer being enjoyed by current generation because the members are now retired. As such, it is not fair, from an intergenerational equity standpoint, to place the entire burden of funding the remaining benefits for these members on a single generation (as under the current plan). A longer time horizon for amortizing these benefits that spreads the costs over multiple generations would be more appropriate. The second argument is the undue burden that the cost of these benefits places on current employees. Today, the unfunded liability for members hired prior to prefunding represent a combined $21.1 billion of SERS’ and TRS’ combined $25.7 billion unfunded liability, while members hired after prefunding represent only $4.6 billion. Combining the pension costs for members hired prior to pre-funding with those for members hired afterward skews the perception of pension benefits for current employees by misrepresenting the pension cost of current employees to the taxpayer.

As if it would be fairer to have taxpayers in 2050 (or 2525) pay for promised benefits that were not funded by what would then be several generations.

There have been several silly ideas advocated by pension ‘experts’ in the employ of politicians:

• open-amortization periods
• negative amortization in the early years using level-percentage-of-payroll
• interest rates averaged over terms long enough to include the triple-digit-inflation expected around 2090

all designed to lower immediate contribution amounts and con taxpayers.  This CCR study adds one more.