Two weeks ago, we highlighted ways pension opponents like the Reason Foundation gaslight the public on the facts about public pensions. Today we’re diving deeper into how the Reason Foundation spreads misinformation about public pensions by examining a blog post they published last month titled Public Pension Plans Won’t Be Able to Invest Their Way Out of Financial Losses, Unfunded Liabilities.
Reason argues that the discount rate – an assumption on future investment earnings – for several public pension systems around the country is too high and needs to be lowered. When lowered arbitrarily, this makes the plan seem more expensive because it will need higher employer and employee contributions in order to make up the difference in lower investment earnings.
The blog cites the coronavirus-induced economic crisis as the principal reason why discount rates should be lowered, but it excludes several key facts that would undermine this argument.
For example, it fails to mention that, after an initial dip in March, the stock market has mostly recovered all of its recent losses. By omitting this fact, Reason suggests that the economic crisis is continuing to wreak havoc for investors, but so far the performance of the stock market has not mirrored the performance of the overall economy during this economic downturn.
Secondly, Reason cherrypicks pension systems like the Arizona State Retirement System (ASRS) and the Iowa Public Employees Retirement System (IPERS) and examines their funded ratios to claim (without evidence) that they have issues with underfunding and that a recession could negatively impact them long-term. Both systems are in solid financial footing with funded ratios above 70 percent.
When a pension system does not have enough assets to pay out benefits to all current and future beneficiaries at a specific point in time in the future, this will lower the funded ratio of a plan, creating an unfunded liability. However, the system never needs all of that money at one time, as we’ve explained before:
An employee working today who will retire and begin collecting her pension benefit in twenty years won’t collect her entire benefit all at once. She will receive her pension benefit paid out in monthly installments over the course of her retirement, which could be another twenty years. So, for our public employee working today, the pension plan in which she participates has twenty years to earn investment returns on the contributions to her pension and may then have another twenty years over which to pay out those benefits. If the pension fund today only has 85 percent of what it will owe her, that does not mean there is a pension crisis because the fund has a long time to earn investment returns and then pay out its obligations.
Pension plans are designed to withstand the ups and downs of the market due to their mix of high- and low-risk investments spread out over a longer period of time. The National Conference on Public Employee Retirement Systems (NCPERS) has found that pension debt has remained stable over the past 20 years, a time period which includes two major recessions (the dot com crash in 2001, and the Great Recession in 2008). So long as Gross Domestic Product (GDP) continues rising alongside pension debt over the long term (which has been the case the past several decades, despite the aforementioned recessions and others), pension systems will be able to manage corresponding levels of debt.
What Reason fails to mention throughout their piece is that investment earnings cannot make up for the need for funding discipline, which is a major reason why systems were able to recover following these downturns. The lack of funding discipline from state legislatures prior to the Great Recession caused many systems to fall behind. Luckily, many states have corrected course and need to stay on path to ensure that future costs do not rise.
The fact that both ASRS and IPERS also reassured their members about how stable their systems are is further proof that they, along with most pension systems across the country, will be well-equipped to manage this current economic crisis and continue paying benefits now and into the future. This need to reassure public employees about their retirement security was partly because Senate Majority Leader Mitch McConnell falsely suggested in April that state and local governments should declare bankruptcy in response to the economic crisis, creating confusion that public employees would lose their retirement if such a thing happened.
Reason’s arguments simply do not hold up to the myriad of evidence about how pensions are a stable and effective way to guarantee retirement security for public employees.