Flipping through old photo album provides a view of where we have
traveled. But, it certainly doesn’t tells us where we are today. The same can be said of the recent Pew Center on the States “new” report on public pension plans.
It really is only a look at pension plans at the end of their 2010 fiscal year. For some plans, that could be up to three years ago. Today we are in a different place, as the financial markets have improved and state legislatures have adopted pension plan changes.
While the Pew report acknowledges these pension plan changes in its narrative, it fails to take into account the actions taken in 41 states in response to the market losses caused by the financial crisis. The vast majority of states have enacted changes in their retirement plans designed to ensure their long-term sustainability. These changes are unprecedented and significant: increasing employee contributions, raising retirement ages, lowering benefits, and cutting cost of living adjustments.
In fact, Standard & Poor published a report today which finds pension funding levels appear to be, in some cases, gradually improving with close to one-third of plans showing higher funded ratios, according to the S&P 2012 annual survey "The Decline In U.S. States' Pension Funding Decelerates, But Reform And Reporting Issues Loom Large."
If merely presenting Pew’s snapshot of funding data was the goal of the report, then using old data and choosing to ignore significant plan changes might only obscure the hotly debated changes already made. However, when the Pew report extends its purpose to rating plans and recommending pension reforms, then failing to consider more timely data and the impact of the recent plan changes exposes a flawed model.
With regard to the Pew rating system, its grades are overly simplified and can be misleading. For example, the text of the report mentions that both Utah and Idaho slipped from the Solid Performer category into the Needs Improvement (NI) category. Yet, Utah has already made drastic changes to the pension plan's benefit structure that are cited elsewhere in the report as a positive reform. So, why downgrade the Utah plan in 2010 to NI. Does that make sense?
Even more puzzling is placing the Public Employees Retirement System of Idaho (PERSI) on the Needs Improvement list. Idaho PERS reported a funding level of 90.2 percent on July 1, 2011 based on its market value of assets. Idaho is one state that has not made plan changes because they have been doing the right things year in and year out.
More specifically, the NIRS’ Lessons from Well-Funded Public Pensions report looked at ten years of funding data from PERSI and found its long term practices sound. Idaho's 2010 total plan contributions equaled 113 percent of its actuarially required contribution (ARC), putting the system at the top of Pew list for that criteria. For the ten years of PERSI funding history that NIRS studied, Idaho contributed 100 percent or more in 9 out of the 10 years, with that one outlying year still contributing 97%.
Additionally, Idaho lowered its interest rate below 8% in 2004 before the stock market fell in 2008, and today it assumes a 7.75% return.
Some folks like to look at old photos, but what might be more useful for policymakers and the public is to gain a more current picture of the direction on which pension funding is heading is contained in this chart. Using the similar plan reported data, a Boston College Center for Retirement Research report points to the future and helps policy makers understand the pension funding is starting to turn the corner. Under moderate economic assumptions, aggregate pension funding is projected to cross over the 80 percent level in 2015, without taking into account the pension reforms passed by the 41 states. Fine tuning may still be needed, but we are making progress. This is not reflected in the limited snapshot provided by the Pew study.
It’s also important to look at last week’s Federal Reserve Bank’s wealth and income data from the Survey of Consumer Finances (SCF). This SCF report highlights the broad underfunding of retirement security in America that is not covered in the Pew report.
Specifically, the median 401(k) account balance was down to only $44,000, and was less than the median annual income level of $45,800. That account value is nowhere near what is needed to pay bills throughout retirement and remain self-sufficient. The Center for Retirement Research estimates that the average family in the age 35-64 range had a retirement income deficit of $90,000 in 2010.
Using the Pew scale, our nation's crumbling retirement infrastructure for private sector workers is an issue of "serious concern." Americans are less than third of the way to what they need for retirement. That’s not a pretty picture; we need a “savings photo shop” of our retirement system that is overly reliant on 401(k) individual accounts.
Posted by Diane Oakley, NIRS Executive Director, June 22, 2012