The Federal Reserve released welcome data its June 2009 Flow of Funds report indicating that the economic situation may be stabilizing. Disposable personal income rose by $142 billion in the first quarter 2009 and by $358 billion since the first quarter of 2008.

This is a year-over-year gain of 3.4%.

With regard to household debt, it's down about 0.6% from a year ago while personal saving is way up.  Personal savings in the first quarter 2009 came in at $475 billion.  That’s more than personal saving for 2005, 2006, 2007 and 2008 combined.  It seems that households have a little more money in their pockets perhaps because of the stimulus package tax cut.  With that money, many Americans seem to be focused on getting their financial houses in order by paying down debt and saving more.

But even so, the road to recovery will be a long one.  Fed data also indicate that household net worth plummeted 16% in the last year.  The massive financial losses will present significant challenges for retirees and near-retirees.  Many will not have time to recover losses to their retirement savings accounts and housing values.

For individuals fortunate enough to have access to a pension plan, the news is a bit brighter.  Despite the significant losses that pension funds have endured along with all investors, these funds still have enough assets in reserve to pay promised benefits for years to come.  Further, pensions have a longer time horizon than individuals to recover losses, a point highlighted in a recent analysis by Standard & Poor’s.

Standard & Poor’s June 8th analysis noted that most state and local pension plans deploy “smoothing” techniques that allow gains and losses to be smoothed in over longer periods than a single year.  This should give state and local governments “breathing room” to recover losses rather than forcing higher contributions tied to the wild drop in the markets.  In the coming years, the economy may be on the mend and state and local governments likely will be in a better fiscal position to fully fund their pension obligations.

The Standard and Poor’s analysis also indicates that prior to 2009, public pensions funding ratios were “generally strong,” a finding consistent a 2008 Government Accountability Office report (although news media reports continue to mischaracterize funding levels).   Certainly, the large investment losses may require shared sacrifice to recover - perhaps in the form of increased contributions from employees and employers and/or reexamining benefits.  NIRS’ research report, “In it for the Long Haul,” indicates that public pensions were prudent investors in the last market downturn.   This investment discipline, coupled with a careful examination of the sustainable path forward, should enable plans to recover over time in a reasonable way.

The Standard and Poor’s analysts also indicate that state and local policymakers are not trending toward defined contribution accounts.  West Virginia and Nebraska actually moved back to a pension system after a disappointing experience with individual accounts, while Alaska legislators have been looking to reopen the pension plan they froze in 2005. NIRS research is consistent with these findings. In fact, we found in “Look Before You Leap,” that switching to a DC plan can in fact INCREASE costs.  That is the last thing that struggling state and local governments need right now.

With regard to private sector pension plans, the House Education and Labor Committee voted on June 24th to approve legislation to give companies some breathing room to recover from investment losses.  An amendment to the 401(k) Fair Disclosure and Pension Security Act of 2009 would allow private sector pension plans to contribute to their plans only the interest on their 2008 asset losses over the next two years, then amortize the year’s actual asset losses over the subsequent seven-year period.  Such temporary relief will help companies face economic challenges, while still enabling them to offer pensions that are so necessary for their workforce’s retirement security.

We’re encouraged that policymakers are taking thoughtful approaches and continue to see the value of pensions in ensuring retirement security.  With smart policy choices by plan sponsors and legislators, these retirement vehicles can endure this economic downturn and continue to provide retirement security for another generation of middle-class American workers.

Posted by:  Ilana Boivie, Policy Analyst, June 29, 2009

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