Harvard Paper: Solutions in Sight for Underfunded Public Pensions

The size of the public pension problem in the United States is growing, and a new paper published by the Harvard Kennedy School for Business and Government explores the obstacles to reform along with potential solutions.

(April 26, 2012) — Total unfunded public pension liabilities in the United States are growing, fueled by an interwoven array of financial, legal and political intricacies, according to a new paper written by Thomas Healey and Kevin Nicholson of the Harvard Kennedy School along with Carl Hess from Towers Watson Investment.  

Solutions, however, may be in sight, the authors assert, if major benefit design changes and potential financing changes are implemented, including the following.  

1. Eliminate legislative end runs around the collective bargaining process.

2. Tighten up eligibility for heavily subsidized benefits, such as disability and early retirement.

3. Raise the age of eligibility for full retirement benefits. 

4. Reduce the intergenerational risk transfer.

5. Control and monitor the size of a pension plan’s funding ratio. 

Over the past several years, estimates of the total size of the public pension problem in the US have ranged from $730 billion in unfunded liabilities to $4.4 trillion.

“Indeed, the public pension problem manifests itself hundreds of times across the United States, in all 50 states and in numerous municipalities,” according to the paper, published by the Harvard Kennedy School for Business and Government. The paper furthermore notes that some analysts of total unfunded public pension liabilities estimate that they have grown by a magnitude of six over the past decade. 

The paper adds that underfunding problems are intrinsically linked to the outsized nature of the promises made to public pension beneficiaries. Furthermore, changes proposed by the Government Accounting Standards Board (GASB) could soon bring hundreds of billions of dollars in unfunded liabilities on to the financial statements of public pension plan sponsors, according to the paper. 

The authors continue: “We acknowledge that the road to substantive pension reform is a difficult one, fraught with legal, political and financial obstacles…The financial outlook for many public pension plans is bleak, but solutions do exist.”

Read the full paper here.