Retirement Funding Status and Trends: Rough Seas Ahead

Elizabeth Kellar, President/CEOCenter for State and Local Government Excellence

www.slge.orgMay 19, 2010

The Current Economic Picture

• Sustained fiscal constraints for states and localities

• Looming workforce challenges

• Unfunded liabilities

• Federal deficit looms

• Major changes ahead

The Perfect Storm

The Not-So-Great Recession

• Economic downturn continues for state governments thru 2010 and 2011

• All sources of revenue are down: income, sales, property taxes

• Federal deficit looms

• Regional differences

http://www.cbpp.org/files/9-8-08sfp.pdf [Center on Budget and Policy Priorities]

THE CURRENT HUMAN RESOURCE REALITY

State and local governments feel the squeeze

Competing for Talent

• Good benefits help recruit and retain employees

• But reductions in benefits are today’s reality• 70% have increased employee contributions

to health care• 18% require new workers to contribute more

to pension plan; 8% increased years required to vest in plan

45.0%

11.0%

40.2%

2008 Private Sector

No pension plan at work

Pension plan at work, but not included

Included in pension plan at work

18.3%

8.9%

70.9%

2008 State and Federal Government

No pension plan at work

Pension plan at work, but not included

Included in pension plan at work

18.1%

8.1%

71.7%

2008 Local Government

No pension plan at work

Pension plan at work, but not included

Included in pension plan at work

Who has a pension?

From: Current Population Survey

Retirement Delays

The Status of State and Local Plans in 2009

Research Team

Alicia H. Munnell, Jean-Pierre Aubry, and Laura, Quinby

Center for Retirement Research

at Boston College

Key Findings

• Most pensions were over 80 percent funded in 2008

• In 2009, only 36 percent of plans studied were over 80% funded

• Most pension plans will not return to 80 percent funding levels by 2013 unless contribution levels increase

Public and Private Plans

• Invest about 70% of their assets in equities

• Were 80-90% funded

Crystal Ball Projections

• Most likely: 2010 actuarial reports will show assets equal to ~77% of promised benefits; by 2013, ratio will drop to 72%

• The pessimistic ratio for 2013 is 66%

• The optimistic ration for 2013 is 76%

What are plan sponsors doing?

• Louisiana extended the amortization period to 2040

• Vermont extended its funding period to 2039

• California expanded the corridor on the actuarial value of assets to moderate the required increase in the ARC.

WHERE DO WE GO FROM HERE?

The Public Debate

• What rewards are appropriate for a career of public service?

• Are years to vest in plan appropriate?

• How are new hires treated?

• What should the “normal” retirement age be?

Political Issues

• Generation equity• Transparency• Management challenges with lower

tiers of benefits for new hires• Hybrid plans• Competition with other demands• Who pays?

Government Retirement Plans Could Be Models for Private Sector

• Employees contribute to retirement

• Retirement security is a priority

• Take a long view

• Professional management assets are the norm

• Should private sector employees be allowed to buy into public plans?

For a copy of Center’s free research publications, visit:

www.slge.org