Although many lawmakers bemoan pensions as the bane of state budgets for being expensive and underfunded, a new report from the National Conference on Public Employee Retirement Systems (NCPERS) found that state and local pension plans have been able to meet their obligations consistently over the past 25 years.
NCPERS said the findings offer a “striking counterpoint” to initiatives taken by some states and municipalities to dismantle public pensions because they are considered under-funded.
“Pensions have come under attack for many years,” Michael Kahn, NCPERS’ director of research, told CIO. “And we think there are some problems with the two arguments we most often hear: That taxpayers can’t afford pensions, and that pensions can’t meet their obligations if they’re underfunded.”
According to NCPERS, contributions and investment earnings by 6,000 public pension plans between 1993 and 2016 exceeded benefit obligations in all but four years. It also said that during those four years of exceptions—2002, 2008, 2009, and 2012—all plans were able to meet their obligations in the wake of recessions because they had built up reserves during normal times.
“Most arguments against public pensions are based on assumptions about the future,” said Kahn. “No one can reliably and accurately see into the future, but we can certainly look at the past and measure what actually happened. And what happened is that pensions consistently met their obligations regardless of their long-term funding levels.”
The report found that regardless of a pension plan’s funding status, individual states had between five and eight years in which income fell short of obligations, and had to draw on their cushion to pay benefits. However, “this is exactly what public pensions are designed to do,” said Kahn. “To provide a steady income over the long haul. Pension assets typically are invested over a 30-year time horizon, so plans aren’t blown off course by short-term market shifts.”
The NCPERS report offered four recommendations for public pension plans:
- Stop dismantling plans on grounds that they are not fully funded.
- Improve funding by determining the appropriate levels of required employer contributions.
- Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances, such as a recession.
- Implement a mechanism to ensure that full employer contributions are made on a timely basis, for example, by making employer contributions a nondiscretionary part of the budget.
“We have already debunked the notion that taxpayers can’t afford pensions by demonstrating that pensions are revenue neutral or revenue positive,” said Kahn. “We felt it was time to look at how funding levels, which vary widely, actually impact the ability to pay benefits and meet other obligations.”