Government pensions at the state and local government level have come under attack in recent years over their viability. Much of this attack has been political and is being used to go after unions and pensioners who tend to support one party or another. State and local governments work hard to maintain viable long term pensions and ensure their recipients their contributions will be returned to them. However, major concerns arise if that viability is in question, and many unintended consequences could result from a successful attack on pensions.
For instance, in many states, those on pension plans do not contribute to social security. In fact, 25 to 30 percent of state and local governments and their employees make contributions to pensions in lieu of social security. Dismantling of pensions could lead to dramatic cost increases in those states for public assistance programs since most pensioners were not planning for it to be wiped out. And with no social security eligibility, they will depend on other means. Often we overlook these types of consequences of policy decisions.
Nationwide, state pensions account for between one to six percent of budgets, with the overall average a little below three percent. Since 1982 this three percent breaks down, on average:
- Employer contributions are 28% of the plans
- Employee contributions are 12%
- Roughly 60% are investment returns
Recent news stories have covered efforts to increase returns by taking on riskier investments, like hedge funds, which, in the recent past have not increased earnings but have dramatically increased fees.
Much of the current long term pension funding challenge stems from the dramatic downturn in the 07-09 time period. Just as any 401k plan took a hit, so did defined benefit plans. Long term, there is nearly $3 trillion set aside in pension trusts for current and future retirees, according to the National Association of State Retirement Administrators. This means there are substantial assets to weather the current crisis and provide long term for current and future retirees.
All of that said, this manufactured crisis has focused some attention on investment returns. Rate of return and the amount of risk taken to gain those returns is now an extremely important issue. Governmental Accounting Standards Board (GASB) regulations are going to create more stringent rules for estimating future returns. Previous assumptions of seven to eight percent will no longer be allowed without strict backup proof. All of this suggests it is time to look at all investments in a portfolio at one time and account for risk, compare equities to bonds to real estate so that portfolio managers can make highly informed decisions on a daily basis. In addition, retirement officers should account for layoffs, early retirements or increased hiring and adjust investment strategy accordingly. Technology has allowed a way to take this comprehensive approach now. And, it is good policy, not just scare tactics.
