U.S. Public Pension Plan Contribution Analysis

The Society of Actuaries (SOA) just released a study comparing pension plan contributions to benchmarks that represent contribution levels needed to reduce unfunded liabilities of state-based and large-city public pension plans in the U.S. Key observations over 2003–2017 include:

  • Most of the plans studied received insufficient contributions to reduce their unfunded liabilities. In 2003, while still feeling the impact of the dot-com market crash, 55% of plans received insufficient contributions to reduce their unfunded liabilities. After reeling from 2008 market crash, the percentage of such plans peaked at 84% in 2011 before falling to about 63% for 2016 and 2017.
  • Some plans received insufficient contributions to reduce unfunded liabilities measured as a dollar amount but received sufficient contributions to reduce unfunded liabilities measured as a percent of payroll. The percentage of plans in this group increased from 36% in 2003 to 77% in 2017.
  • However, of plans whose contributions did not reduce unfunded liabilities as a dollar amount, more than half also fell short of the plans’ Actuarially Determined Contributions (ADC) or other target contributions. This suggests that the process for determining such plans’ contributions may not align with the plan’s funding policy.

It is that last sentence that may be the most radical statement EVER to come out of the SOA (if I’m interpreting it right).

Funding policy for public plans has, for all practical purposes, been defined as doing everything possible to contribute as little as possible so that there is just enough in there to avoid a noticeable crisis during the time the current politicians are in office. The SOA paper rues this situation in the Executive Summary (emphasis added):

Funding public pension plans involves many factors, including approaches to cost, risk and plan management, asset allocation, investment experience, changing plan demographics, actuarial methods and assumptions for computing plan liabilities, relatively long budget planning cycles and contribution decisions that may be subject to legislative processes. If funding is regulated, it is regulated at the state level.

However, the official position of the actuarial community, as stated in a 2012 Issue Brief from the American Academy of Actuaries (AAA), is that:

[a]ctuarial funding methods generally are designed with a target of 100% funding—not 80%. If the funded ratio is less than 100%, contribution patterns are structured with the objective of attaining a funded ratio of 100% over a reason-able period of time

Therefore the stated funding policy for public plans has to be perforce to have pensions 100% funded. Anything less would go against the current position of the AAA, unbiased actuaries, and common sense.  So the obvious assumption is that when the SOA paper refers to the plans’ funding policy it means whatever would get (or for Wisconsin, keep) the plan at the 100% funded level and, if so, then the manner by which the ADC is determined (based on statutory assumptions as dictated by politicians) will not cover benefits being accrued and something needs to change with how that ADC is being determined (presumably by keeping politicians out of the process).

Unfortunately, under the guise of scholarship, this conclusion is shrouded behind a veil of charts and jargon and never explicitly stated (but you get the picture).

10 responses to this post.

  1. Posted by Tough Love on February 12, 2019 at 10:11 pm

    Something that also SHOULD BE part of this discussion ………….

    Because the funding of past-service unfunded liabilities (NOT the Normal Cost for current year service accruals) almost always falls 100% to Taxpayers (with nothing from the workers), it is certainty appropriate for those being called upon to pay for it (the Taxpayers) to understand if what they are being told that they must pay for was indeed ……….. necessary, just, fair to taxpayers, and affordable.

    Any reasonable analysis would show that Public Sector pensions (and especially the richest ones granted POs) ……….. being ludicrously excessive by any and every reasonable metric ……… were never “necessary, just, fair to taxpayers, and affordable”.

    Hence there is no substantive justification for Taxpayers to be forced to fund these patently UNREASONABLE pensions (AND benefits), and that applies to BOTH the unfunded liability associated with PAST service accruals AND the Normal Cost for each new year of accruals granted under overly generous pension formulas and provisions.

    Reply

  2. Posted by skip3house on February 12, 2019 at 11:14 pm

    Get rid of ‘shroud’…” Unfortunately, under the guise of scholarship, this conclusion is shrouded behind a veil of charts and jargon and never explicitly stated (but you get the picture). ” by demanding an 8th grade level of arithmetic be presented for the only measure of full funding. Then, all can know actual health of their pensions. K.I.S.S.

    Reply

  3. OHIO POLICE & FIREFIGHTERS Fund is creating a true situation by not wanting to be in the Pension Fund business. But NOT being eligible for Social Security, is going to be a sample of problems to come IMHO Once again…http://www.cleveland19.com/2019/02/11/people-are-gonna-die-because-this-retired-ohio-police-firefighters-grapple-with-deep-pension-cuts/?fbclid=IwAR1oIBtZyyL6QYtyuU8dj2IeYha8O5j6ybHKiaujj5Z0rqPj0SNzAusF3XU

    Reply

    • Posted by Anonymous on February 13, 2019 at 1:33 pm

      Very true John. However, I wonder why they dont. get Medicare? I have paid into that from my first pay check. I do remember older guys saying the had to get 40 quarters of private sector work to get Medicare. I think guys hired prior to 1988 or so. Could be mistaken. Here in NJ our pension fund isn’t in the healthcare business. I was never enrolled in SS. May the road rise to meet you my friend and best of luck in all future endeavors.

      Reply

      • Posted by PS Drone on February 13, 2019 at 5:59 pm

        I think if you are over 65 you can enroll in Medicare even if you did not contribute to it via payroll taxes while you worked, you just have to pay a much higher premium (e.g. $400 or more per month) for it.

        Reply

    • Posted by Anonymous on February 13, 2019 at 5:59 pm

      “OHIO POLICE & FIREFIGHTERS Fund is creating a true situation…”

      John, we all have to get used to the FACT that there is much comeuppance on the way. Very few will be left out. Almost all will get their fair share. The good news is that a sensible diet taken at home is still quite reasonably priced. Staying fit also doesn’t cost much. Stay well, sir.

      Reply

    • OHIO POLICE & FIREFIGHTERS Fund is creating a true situation by not wanting to be in the Pension Fund business. But NOT being eligible for Social Security, is going to be a sample of problems to come IMHO Once again…

      “Diana can no longer take her medication. It costs $4,000 a month, and she can’t afford it. Her husband Kevin has been prescribed a $4,300 brain scan for Alzheimer’s. She can’t afford it.”
      Medication that coast $4K/MONTH????

      Reply

  4. Posted by Anonymous2 on February 13, 2019 at 2:02 pm

    Individuals hired after March 31, 1986
    State and local government employees hired (or rehired) after March 31, 1986 are subject to mandatory Medicare coverage, unless specifically excluded under Section 210(p) of the Social Security Act. After this date, state and local government employees were required to pay toward the FICA payroll tax. These beneficiaries, therefore, may be eligible for premium-free Part A, as long as they have enough working credits.

    https://www.ncoa.org/wp-content/uploads/medicare-for-state-employees-and-retirees.pdf

    Reply

  5. Posted by Michael G Riley on February 13, 2019 at 10:42 pm

    Please view the History of Providence Rhode Island if you want a treatise on political lies and misleading municipal investors and the public . Providence is currently 24 % funded using false assets and a 8% discount rate. It is a study in corruption and deception.

    Reply

  6. Niice Share, Keep working hard!! 🙂

    Reply

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