The Future of Public Pensions (Diane Oakley)

8/6/2019 The Future of Public Pensions (Diane Oakley)

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Retirement Issues for the 21stCenturyNational Press Foundation

Washington, D.C.

June 13, 2011

Diane Oakley

Executive DirectorNational Institute on Retirement Security

The Future of Public Pensions

www.nirsonline.org


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Why Increased Focus on Public Sector &

Pensions?

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

Seen inaccurate assertions inoutsized growth of public sectoremployment.

Middle class jobs in the privatesector are disappearing.

The share of middle income jobs inthe U.S. fallen from 52% in 1980 to42% in 2010.

Middle income jobs have beenreplaced by low income jobs, whichnow make up 41% of totalemployment.


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Private Sector: Lower Income Now,

Less Retirement Security Later

Source: New American Foundation, DOL,PBGC, EBRI

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

Source: New American Foundation, Bureau ofLabor Statistics, Westwood Capital


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Wall Street Meltdown Dealt

Severe Blow to Middle Class

Source: New American Foundation, Bureau of Economic Analysis

Household net worth declined

from $65.7 trillion in the secondquarter of 2007 to $56.8 trillion inthe fourth quarter of 2010.

Wealth recovered $8.1 trillionsince the first quarter of 2009,

due mostly to recovery of stockprices.


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Already, Severe Private Sector

Shortfall in Retirement Savings

The median value of retirementsavings for retirees is $45,000

The average retiree has aretirement savings shortfall of$47,732, with larger shortfallsamong low-income Americans

Many Americans were relying

on rising home values to financetheir retirement and have undersaved.


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Great Recession Fallout on Middle

Class: Home Equity & Wealth

Source: New American Foundation, Kennickell (2009)

Home equity makes up a greater shareof wealth for the middle class than forwealthy families.

For families up to 90th percentile of networth, home value makes up 50% ofworth.

However, significant decline since 2007,Case Shiller Home Price Index declinedby 30%, could fall another 10-20%.

Dont forget 23% of all residentialmortgages underwater.


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Public Pensions: Strong Financials for

Most Plans Going into Financial Crisis

8588

96

103

91

85

9088

87 8688

8479

77

0

20

40

60

80

100

120

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

Aggregate State and local pension funding level assetsas a share of trust fund liabilities (percent)

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


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0%

5%

10%

15%

20%

25%

30%

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

Funding Ratio (Percent)

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

Vast Majority of Public Plans Well Funded

Source: Center for Retirement Research, Boston College


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Public Pensions Showing Strong Recovery

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

Source: National Association of State Retirement Administrators


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13.1

0.4

4.55

8.8 8.8

0

2

4

6

8

10

12

14

1 3 5 10 20 25

Years ended as of 12/31/10

Median annualized public pension fund investment returns

for periods ended 12/31/10

Strong Investment Returns:

Exceed 8% Over Two Decades

Source: NASRA based on Callan Associates Data


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Historical Snapshot: Investment Returns

Source: Gabriel, Roeder, Smith & Company


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Using Theory Rather Than Reality Artificially

Inflates Public Pension Costs

Risk-Free Rate Leads to Increased Costs

Source: Government Finance Review, February 2011


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Using Theory Rather Than Reality Artificially

Creates Surplus

Risk-Free Rate Leads to Excess Funding



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Public Pensions Are Small Portion

of State/Local Budgets

Source: U.S. Census Bureau

Employer (taxpayer) contributions as a percentage

of all state and local government spending, FY 08


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On Average, Public Pension Benefits Modest,

With 30% of Workers Not Eligible for Social Security


1,326

1,306

1,377

1,430

1,488

1,5571,584

1,497

1,7161,775

1,847

1,8711,865

1,852 1,871

1,888

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Average Monthly Public Pension Benefit, 1993-2008(2008 Constant Dollars)


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Employee and Employer Pension Contributions, 1982 to 2009

Public Pensions Typically Are Shared

Funding Responsibility



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Public Pensions Implementing Changes

to Ensure Long-Term Sustainability



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By itself, freezing plan does nothingto close and funding shortfalls

Freezing plan undermines theeconomics of the plan by starving itof new entrants

Because of accounting regs, plan

costs can actually increase

Undermines retirement readiness

DB to DC Switch Not a Viable Solution

Source: National Institute on Retirement Security, Look Before YouLeap


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Pensions Make Sense for Public Sector

Sector Employers, Taxpayers

State and local governments also have a strongcomparative advantage relative to private industry inoffering pension benefits.

Since many of the most common government jobsfirefighter, police officer, corrections officer, regulatoryoverseerhave no direct private sector analog, thelifetime-with-one employer career path scorned by many

in the private sector makes a lot of sense for governmentemployees.

Eli Lehrer, Heartland Institute, Weekly Standard, March 28, 2011


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84% Americans Concerned Current Economic

Conditions Hurt Retirement

American Retirement Panic Attack

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

Roadmap for Policymakers


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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


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Regulations, Funding Volatility Kill

Private Sector Pensions - Not Costs


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Corporate vs. Public Pension Funding Levels, Costs

Comparison of corporate and public

pension funding levels, 2000 to 2010Comparison of change from prior year in corporate

and public pension contributions, 1989 to 2009

89909192 9 9 9 9 9 9899000102 0 0 0 0 0 08 09

0

0

80

-20

20

0 Corporate

Public

US Dept of Labor,

US Census Bureau,Milliman

*

* stimate

00 01 02 0 0 0 0 0 08 09 10

80

100

120

FundingLevel

Corporate

Public

Wilshire, Milliman, and

Public Fund Survey

*

*Estimate

Regulations, Funding Volatility Kill

Private Sector Pensions - Not Costs


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Costof C Pl s ofP oll

. .

Pl C Pl

Cost

No Longevity Risk Pooling

Less l nce Portfolio

LowerReturns/HigherFees46

S vings

Pensions Most Economic lly Efficient

Retirement Pl n: HALF the cost

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


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The Real Retirement Issue?

Underfunded Individual Accounts

Source: Michael Kitces, The Nerds Eye View in The New YorkTimes


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Future Outlook?

Public pensions will continue to recover.

States will continue to implement changes to ensurelong-term pension sustainability.

State & local government will continue to offerpensions with supplemental DCs.

Watch for NIRS forthcoming study on public pensionsustainability.


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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


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Diane Oakley

202.457.8190

[email protected]

www.nirsonline.org

The Future of Public Pensions (Diane Oakley)

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