From the tiny Citrus Pest Control District in California to the giant Illinois Teachers Retirement System, pension woes have settled in across the nation. This massive and growing disaster – that currently stands at nearly $2 trillion in debt for our country – must be a priority of our next President.
Taking a look at the past few decades, there has been a tendency to count on high earnings assumptions that never panned out, and common practice to “look the other way” on the gap between what plans promise and the amount of money set aside to pay for those promises. Many plans, like those in Illinois, California, Kentucky, Louisiana and Connecticut, have been troubled by years of official neglect.
According to an article in Pensions & Investments, a public policy report written by members of a Society of Actuaries and American Academy of Actuaries joint task force found that earnings assumptions are far too optimistic across the board. The founder of Vanguard Mutual Funds, recently said that in the age of zero interest rates, investors must expect no more than a 2% return on their investments for the next ten years. The Governmental Accounting Standards Board (and accounting industry rule maker) is now weighing in and requiring pension plans to report their liabilities with more realistic rates.
Defined benefit plans in the U.S. are entering a new era.
By the summer of 2018, the American people can expect to see state and local plans across the country coming out with funding ratios at a fraction of what they have been reporting. In many cases this will trigger increased contributions to the plans that will bust already fragile government budgets, crowding out vital public services. In all cases, beneficiaries will be less secure.
Before our public pension systems fall apart, plans should adopt two new metrics:
First, the plans should report the actual future cost of the benefits the plans are obligated to pay, not discounted by any expected earnings. If they wish to disclose a discounted number as well, they can do so in a footnote.
Second, there should be a new measure of solvency, or the number of years of benefits that the plans can cover with the current value of their assets. In Chicago, the five big public pension plans have a combined 6.1 years of benefits covered. The worst of these plans, that for Firemen, has only 3.57 years of benefits in the bank. With these more meaningful metrics, the public and officials will see quite clearly the crushing consequences of unsustainable plans.
This should spark widespread acknowledgment that we can no longer support plans as they are currently structured. If politicians don’t see it then – and recognize that something big, bold and painful must be done soon – then they are not fit for office. Where they can, state and local governments will modify benefits and then freeze and terminate the plans. Where these governments are restricted from doing so by law, constitution, or political domination, federal intervention will be necessary.
The Center for Pension Integrity has developed a concept for troubled plans modeled after the Windfall Elimination Provision Relief that has been used with Social Security. This would not be a bailout, but a voluntary opportunity for governments to modify provisions and benefits, and ultimately freeze and terminate, troubled plans with funding levels below 50 percent.
Simultaneously, in order to give beneficiaries complete security for what is left in the plans, local taxes would be raised to completely fund the restructured plans. Since the plans would be terminated, taxpayers would finally be able to see their way out of this enormous problem.
In order to eliminate the windfall that some beneficiaries receive from current, generous plan provisions – and at the same time protect those receiving modest pensions – the plans restructuring would include: a cap of 150 percent of the local median income on overall benefits, elimination of automatic cost of living adjustments and no one would receive benefits until the age of 65.
In 1961, private sector plans were in trouble after years of unregulated abuse. President Kennedy appointed a committee to study the problem and the result was 1974’s Employment Retirement Income Security Act (ERISA). The next President and Congress cannot wait that long to act. They must get ahead of this gathering storm and appoint a commission to study the problem and provide solutions like mine, soon. If not, this drama will be an unnecessary tragedy for beneficiaries and taxpayers alike.
Ed Bachrach is the Founder and Chairman of the Center for Pension Integrity -- a public policy institute based advocating for a viable solution to the nation’s public pension crisis.
The views expressed by authors are their own and not the views of The Hill.