Another voice chimed in this week on the unhealthy status of America’s public pensions. The Congressional Budget Office wrote, “The recent financial crisis and economic recession have left many states and localities with extraordinary difficulties for the next few years, but structural shortfalls in their pension plans pose a problem that is likely to endure much longer.”
The Congressional Budget Office is the federal agency mandated to provide nonpartisan analysis to the U.S. Senate and House budget committees. CBO also creates an independent re-estimate of White House federal budget proposals. It regularly studies issues like pensions.
CBO analyzed the Public Fund Survey of 126 state and local government pension plans and it reported those plans held $2.6 trillion in assets in 2009 compared to $3.3 trillion in future pension payment liabilities. The result would be a $0.7 trillion unfunded liability which the Congressional Budget Office said was the lowest percentage asset level in two decades.
CBO Director Douglas Elmendorf explained the actual problem is more serious in his note that was attached to “The Underfunding of State and Local Pension Plans.” Elmendorf wrote:
“The reported amount of underfunding varies significantly depending on the approach used to calculate assets and liabilities. The estimate of unfunded liabilities cited above — $0.7 trillion – is calculated based on the actuarial guidelines currently followed by state and local governments. Under those guidelines, actuaries compute liabilities by discounting future benefit payments using a discount rate based on the expected rate of return on the plans’ assets.
“An alternative method, the so-called fair-value approach, aims to measure the market value of assets and liabilities. It more fully accounts for the costs that pension obligations pose for taxpayers by discounting future cash flow rates at a rate that reflects their risk characteristics. Because the future cash flows associated with accrued pension liabilities are fixed and carry little risk, the discount rate used under this approach is lower than under actuarial guidelines. That approach yields a much larger estimate of unfunded liabilities for those plans in 2009 – between $2 trillion and $3 trillion.”
Pension fund assets are further impacted by total years of service and salary levels at retirement, how long pensioners are projected to live and cost-of-living adjustments. They also are affected by pension plan changes as governments move from defined benefit pensions based on service years and salary to 401k-style pensions in which employees make contributions to funds they manage and employers provide some matching funds.
The Pew Center on the States released a similar report on April 26. Pew estimated that states had a $1.26 trillion unfunded liability in pension and retiree health care accounts. Click here for the Congressional Budget Office report. Click here for the Pew Center on the States report. The idea to take away from all these numbers is that pension funds are in deep water.
(Mike Klein is Editor at the Georgia Public Policy Foundation)
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