by Jim Wood and Bob Shapiro

HEADS UP!

If you are between the ages of 25 and 45, there’s a stream of public debt bleeding from our generation (i.e., baby boomers) to yours (i.e., Gen Xers and Millennials).

Let’s get the politically correct disclaimer out of the way at the front end. There are some reasonably-managed, reasonably-funded public pension funds.

Unfortunately, it has become clear in recent years that an unacceptable number of public pension funds are not well-managed and well-funded. That’s the conclusion from some of the nation’s most respected actuaries and other public pension plan professionals, who concluded that, “…the financial condition of public pension trusts has weakened during the last fifteen years, while its exposure to future financial and other exposure risks has increased, perhaps materially.” (Society of Actuaries Blue Ribbon Panel on Public Pension Plan Funding: Summary of Recommendations)

The experts say that their troubling conclusion is supported by evidence of, “…self-reported funding ratios, the history of sponsors’ payment of recommended contributions, greater levels of investment risk taking, and funding analyses that may not have adequately captured the changing economic outlook…”

WHY YOU SHOULD CARE

You, we, all of us should care about the weakening of public pensions because it erodes support for critical public services upon which we all depend and because the bill for making good on unfunded promises will inevitably go to those still drawing a paycheck.

  • A THREAT TO IMPORTANT PUBLIC SERVICES
    The Chair of that Society of Actuaries-sponsored Blue Ribbon Panel of actuaries and other public pension plan professionals describes a “fragile situation” in his introduction to the report summary and warns that, “These challenges are significant and if not resolved will impact not only the strength of public pension trusts, but will affect sponsors’ ability to provide the broad range of public services that citizens are expecting.”
  • AN UNFAIR BURDEN ON YOUNGER TAXPAYERS
    The Blue Ribbon Panel cites three important principles for evaluating the soundness of public pension funding, including: 1) adequacy – roughly defined as 100% funding of the obligations “…based on assumptions that are consistent with median expectations…;” 2) intergenerational equity – the belief that the full cost of public services, including the cost of pensions, should be paid for by those receiving the benefits; and 3) cost stability and predictability – “…level or nearly level costs over an intermediate period….”The Panel specifically points out the importance of “achieving full intergenerational equity,” meaning, “…that current taxpayers should pay the “risk-free” cost of services so as not to burden future taxpayers with the cost of investment risk being levied on current taxpayers. The Panel recognizes that most plans prefer the lower current cost achieved by assuming higher expected investment returns (and therefore higher risk taking and a possible shift of costs to future generations), as opposed to preserving pure intergenerational equity. The Panel believes each trustee/funding entity must determine how to allocate investment risk and that funding programs should explicitly consider the extent to which investment risks and costs are shifted to future generations.”It is impossible to read the report and not conclude that too many public pension funds have not paid attention to all of these critical principles and have instead sacrificed fiscal adequacy and intergenerational equity to a short-term interest in keeping payments low. As a result, the cost of will come due in your tomorrow rather than their today.
WHAT YOU CAN DO

Read the SOA Blue Panel Report at soa.org/blueribbonpanel/
Send the link to your elected officials asking them to read it and asking for information about how your local and state public pension funds meet the funding principles recommended in the report.