On any given day in America, news outlets run headlines sensationalizing the funding status, investment returns, and management of state and municipal pension systems. Whether it’s a Milliman analysis, a Pew report, or a local newspaper, reporting can be confusing at worst and often skewed by the opposition agenda. Luckily, we are here to help you decipher what’s fact and what’s fiction when it comes to pension funding.
Fact: Most public pension systems are financially fit.
Pension opponents spread misinformation about systems’ financial fitness to trick lawmakers and the general public into believing that pensions are unsustainable. They often focus on a system’s Unfunded Actuarial Accrued Liability (UAAL) as a scare tactic. The UAAL–which is the difference between how much money a system has in its reserves and how much it would owe if it were to pay out every single member (including those still working and contributing) their full benefits today–is an essential figure in fund management. Still, the reality is that a pension system will never be required to pay its total obligations all at once. Opponents will tell you that a system less than 100% funded is in danger, but the truth is that the UAAL is not the only indicator of system health, and public pension plans in the U.S. continue to improve their funding statuses.
Fiction: Taxpayers are on the hook for pension liabilities.
Pension opponents, like the Reason Foundation, use misleading headlines to scare everyday citizens into believing their tax dollars are being siphoned away from public services to fund “failing” pension systems. While citizen tax dollars go toward funding state services, there are three pieces to the pension funding pie: employer contributions (in this case, the employer being the state), employee contributions, and investment returns.
States and municipalities must legally follow the Government Accounting Standards Board (GASB)’s pension accounting standards, which require actuarial personnel to estimate future assets and liabilities using demographic and economic assumptions. According to Census Bureau data published by the National Association of State Retirement Administrators (NASRA), investment earnings comprised 64% of public pension revenues in the 30 years between 1992 and 2021; employer contributions comprised approximately 25%, and employee contributions were approximately 11%. However, these percentages are not static due to the stock market’s volatility. For instance, in 2014, net revenue from investment earnings averaged 77% of the funding pie.
Fact: Pensions are gaining momentum in the private sector.
Earlier this year, tech giant IBM made a historic decision to scrap its cash balance retirement plan in favor of a return to a traditional pension plan following negative feedback from employees and dwindling staff retention. This year’s United Automobile Workers (UAW) strikes stemmed from employee demand for better pay and benefits, including pension reinstatement. Employees currently on strike at airplane manufacturer Boeing also demand a return to pensions. As the public sector aims to fill staff vacancies with the promise of a secure retirement, private sector companies are following suit.
Fiction: 401(k)-style plans cost states less to manage.
When Ted Benna realized in 1978 that a small provision in the Internal Revenue Code called Section 401(k) could be used as an alternative to traditional pensions and started pitching it to companies, he didn’t intend to turn the entire retirement industry on its head. In addition to jeopardizing the financial security of millions of Americans, research from the National Institute on Retirement Security (NIRS) confirms that “A typical (defined-benefit) DB plan has a 49% cost advantage compared to a typical individually directed (defined-contribution) DC plan because of longevity risk pooling, asset allocation, low fees, and professional management.”
The fees generated by 401(k) accounts yield billions for Wall Street firms. Pension systems pay far less because they demand lower fees in exchange for allowing firms to manage their large, billion-dollar portfolios. Those fees are then spread among the millions of pensioners instead of each investor absorbing the fees in a 401(k)-style plan.
Fact: Pensions retain employees and save states money on turnover costs.
Pensions are also a highly efficient employee retention tool. This is especially true in public safety and education. The costs related to employee turnover equal 33% of an employee’s annual salary–meaning states are hemorrhaging money by continually training new hires. Add in the unspoken cost of losing experienced workers with strong institutional knowledge, and you begin to see cracks in the veneer of an individually managed retirement plan. Research shows that turnover in states that reformed or closed their pension systems rose exponentially in the years following the system closure.
In today’s world of misinformation, it can be challenging to separate pension fact from fiction. At NPPC, we fight misinformation by sharing clear and transparent information about defined-benefit pensions. Sign up for our Monthly Newsletter or our daily News Clips to stay on top of the latest pension news from across the country.