The Future of Public Pensions

Retirement Issues for the 21stCentury National Press Foundation Washington, D.C.
June 13, 2011 Diane Oakley Executive Director National Institute on Retirement Security

www.nirsonline.org

Why Increased Focus on Public Sector & Pensions?

Seen inaccurate assertions in outsized growth of public sector employment. Middle class jobs in the private sector are disappearing. The share of middle income jobs in the U.S. fallen from 52% in 1980 to 42% in 2010. Middle income jobs have been replaced by low income jobs, which now make up 41% of total employment.

Source: New American Foundation, Bureau of Labor Statistics, Westwood Capital

Private Sector: Lower Income Now, Less Retirement Security Later

Private Sector Workers Participating in Employer Based Retirement Plan by Plan Type, 1979-2008 (all workers)

Source: New American Foundation, Bureau of Labor Statistics, Westwood Capital

Source: New American Foundation, DOL, PBGC, EBRI

Wall Street Meltdown Dealt Severe Blow to Middle Class

Household net worth declined from $65.7 trillion in the second quarter of 2007 to $56.8 trillion in the fourth quarter of 2010. Wealth recovered $8.1 trillion since the first quarter of 2009, due mostly to recovery of stock prices.

Source: New American Foundation, Bureau of Economic Analysis

Already, Severe Private Sector Shortfall in Retirement Savings

The median value of retirement savings for retirees is $45,000 The average retiree has a retirement savings shortfall of $47,732, with larger shortfalls among low-income Americans Many Americans were relying on rising home values to finance their retirement and have under saved.

Great Recession Fallout on Middle Class: Home Equity & Wealth

Home equity makes up a greater share of wealth for the middle class than for wealthy families. For families up to 90th percentile of net worth, home value makes up 50% of worth. However, significant decline since 2007, Case Shiller Home Price Index declined by 30%, could fall another 10-20%. Dont forget 23% of all residential mortgages underwater.

Source: New American Foundation, Kennickell (2009)

Public Pensions: Strong Financials for Most Plans Going into Financial Crisis
Aggregate State and local pension funding level assets as a share of trust fund liabilities (percent)
120 103 100 85 80 88 96 91 85 90 88 87 86 88 84 79 77

60

40

20

0 1994 1996 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999)

Vast Majority of Public Plans Well Funded

Distribution of Funded Ratios for 126 Largest State, Local Pensions, 2010
30%

25%

20%

15%

10%

5%

0% 40-49 50-59 60-69 70-79 80-89 90-99 100+

Funding Ratio (Percent)

Source: Center for Retirement Research, Boston College

Public Pensions Showing Strong Recovery

Change in Combined Assets of State & Local Government Pensions: 2003 2010

Source: National Association of State Retirement Administrators

Strong Investment Returns: Exceed 8% Over Two Decades

Median annualized public pension fund investment returns for periods ended 12/31/10
14 13.1 12

10 8.8 8 8.8

6 4.5 4

2 0.4 0 1 3 5 10 20 25

Years ended as of 12/31/10

Source: NASRA based on Callan Associates Data

Historical Snapshot: Investment Returns

Source: Gabriel, Roeder, Smith & Company

Using Theory Rather Than Reality Artificially Inflates Public Pension Costs
Risk-Free Rate Leads to Increased Costs

Source: Government Finance Review, February 2011

Using Theory Rather Than Reality Artificially Creates Surplus

Risk-Free Rate Leads to Excess Funding

Source: Government Finance Review, February 2011

Public Pensions Are Small Portion of State/Local Budgets

Employer (taxpayer) contributions as a percentage of all state and local government spending, FY 08

Source: U.S. Census Bureau

On Average, Public Pension Benefits Modest, With 30% of Workers Not Eligible for Social Security
Average Monthly Public Pension Benefit, 1993-2008
(2008 Constant Dollars)
2,000 1,888 1,900 1,800 1,700 1,600 1,557 1,500 1,400 1,326 1,300 1,200 1,100 1,000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1,306 1,430 1,377 1,488 1,584 1,497 1,716 1,847 1,775 1,871 1,865 1,852 1,871

Source: U.S. Census Bureau

Public Pensions Typically Are Shared Funding Responsibility

Employee and Employer Pension Contributions, 1982 to 2009

Source: U.S. Census Bureau

Public Pensions Implementing Changes to Ensure Long-Term Sustainability

Source: Government Finance Review, February 2011

DB to DC Switch Not a Viable Solution

By itself, freezing plan does nothing to close and funding shortfalls Freezing plan undermines the economics of the plan by starving it of new entrants Because of accounting regs, plan costs can actually increase Undermines retirement readiness

Source: National Institute on Retirement Security, Look Before You Leap

Pensions Make Sense for Public Sector Sector Employers, Taxpayers

State and local governments also have a strong comparative advantage relative to private industry in offering pension benefits. Since many of the most common government jobs firefighter, police officer, corrections officer, regulatory overseerhave no direct private sector analog, the lifetime-with-one employer career path scorned by many in the private sector makes a lot of sense for government employees.
Eli Lehrer, Heartland Institute, Weekly Standard, March 28, 2011

American Retirement Panic Attack

84% Americans Concerned Current Economic Conditions Hurt Retirement

Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A Roadmap for Policymakers

Private Sector Wants Pensions

81% of Americans Say They Need Pension For Independence, Self-Reliance

Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A Roadmap for Policymakers

Regulations, Funding Volatility Kill Private Sector Pensions - Not Costs

Regulations, Funding Volatility Kill Private Sector Pensions - Not Costs

Corporate vs. Public Pension Funding Levels, Costs
Comparison of corporate and public pension funding levels, 2000 to 2010
Funding Level 120
0 Corporate

Comparison of change from prior year in corporate and public pension contributions, 1989 to 2009

80

Corporate 100

20

Public

80

Public
-20

00 01 02 0
Wilshire, Milliman, and Public Fund Survey

08 09 10* *Estimate

89 90 91 92 9 9 9 9 9 98 99 00 01 02 0 0 0 0 0 08 09 US Dept of Labor, * stimate US Census Bureau, Milliman

Pensions Most Economic lly Efficient Retirement Pl n: HALF the cost

Cost of C Pl s of P oll

46 S vings

Lower Returns/Higher Fees Less l nce Portfolio

No Longevity Risk Pooling Cost

. Pl

. C Pl

Source: N tional Institute on Retirement Security, A Better Bang for the Buck

The Real Retirement Issue? Underfunded Individual Accounts

Source: Michael Kitces, The Nerds Eye View in The New York Times

Future Outlook?

Public pensions will continue to recover. States will continue to implement changes to ensure long-term pension sustainability. State & local government will continue to offer pensions with supplemental DCs. Watch for NIRS forthcoming study on public pension sustainability.

Additional Resources
American Benefits Council Lynn Dudley Boston College Center for Retirement Research Alicia Munnell Chamber of Commerce Aliya Wong Center on Budget and Policy Priorities Elizabeth Liz McNichol Center for Economic & Policy Research Dean Baker Center for State & Local Govt. Excellence Beth Keller Groom Law Group Ian Lanoff ERISA Industry Committee Mark Ugoretz Employee Benefits Research Institute Dallas Salisbury Government Accountability Office Frank Todisco Heritage Foundation David John National Assn. of State Retirement Administrators Keith Brainard Penn State University Ron Gebhardtsbauer Segal Company Cathie Eitelberg University of Massachusetts Christian Weller Yale University Jacob Hacker

www.nirsonline.org

Diane Oakley 202.457.8190 doakley@nirsonline.org