Are Public Pensioners Safe?

BY Paul Solman  October 26, 2012 at 10:55 AM EST

Lonely Planet ImagesPensions for teachers and government employees had the highest funding level among all Arizona public retirement plans. Photo by John Elk via Getty Images.

Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Friday’s comes from a reader at Next Avenue. The NewsHour has partnered with Next Avenue, a new PBS website that offers articles, blogs and other critical information for adults over 50.

Will Williams: My wife and I are retired educators, and we each
get a fixed pension from the Arizona State Retirement System. When we hear
terrible news about the economy, we wonder if our pension is going to be
reliable for us. I would appreciate hearing your opinion.

NextAvenue

Paul Solman: In regards to Arizona, I only know what I read. In regards to health care, the state looks to be in relatively good shape. In FY 2010, Arizona “had a $713 million bill for retiree health care costs,” according to a Pew Foundation study, “69 percent of which was funded, well above the 8 percent national average of 2010.” Indeed, Pew rated Arizona and Alaska its top two health care pension states and dubbed Arizona a “solid performer.”

But when it comes to Arizona pensions themselves, Pew noted “serious concerns”: “Although Arizona consistently paid, or exceeded, its full annual pension contribution from 2005 to 2010, the system was 75 percent funded in fiscal year 2010 and faced a $12 billion funding gap. Most experts agree that a fiscally sustainable system should be at least 80 percent funded.”

The picture is further muddied by the fact that “Arizona lawmakers approved pension cuts in 2010 and 2011, including raising employee contributions, lowering state contributions, and limiting cost-of-living increases. But a district court judge said in 2012 that the higher contributions were unconstitutional, leaving their status in doubt.” (Again, Pew.)

All of that said, you and your wife, Will, would appear to be in a lot better shape than a lot of your fellow Arizona pensioners.

“The largest system, the Arizona State Retirement System, whose members include teachers and government employees,” wrote Craig Harris of the Arizona Republic back in June, “had the highest funding level [of all Arizona pension systems] at nearly 76 percent as of June 30, 2011. That system is the healthiest because its members historically have paid the same amount into the trust as their employers, and it has not given cost-of-living raises to retirees since 2005 because there were not adequate funds.”

My own prognosis for public pensioners is pessimistic. Pension funds are in general underfunded, as we’ve reported early, again and again. They assume unrealistically high rates of return on their assets. They refuse to, or simply cannot, raise taxes on their citizens and businesses. The only alternative is to cut benefits. And that’s happening with increasing frequency all over this land.

PS: A pension expert Paul Solman very much respects, Jeremy Gold, sent the following email not long after the above post appeared. Paul feels that it’s worth appending:

“The idea that 80% funding is somehow considered ok or “fiscally sustainable” or “fully funded” is an urban myth, oft repeated by non-experts including, sadly, Pew.

The American Academy of Actuaries has rebutted this myth.

My own view is stronger. I believe that all plans should, at all times, be 100% funded on an accrued basis using market rates of discount [which are much lower than the rates pension funds use]. Anything less means that the current generation is enjoying (has enjoyed) services that future generations will have to pay for.

My 7th grade social studies teacher, Miss Helen Brown of JHS 188, explained to us the first law of public finance: every generation must pay for the services it consumes as those services are consumed. She said that meant, among other things, her compensation. The city could not borrow to pay her because her compensation was on the city’s “operating budget” and no borrowing was allowed on that budget. She added (she was pretty good at this stuff for a 1950′s JHS teacher) that the city had a “capital budget.” The capital budget built our school. On the capital budget, borrowing was allowed because the school was built in a year and had a forty year service life. So paying off the construction bonds was how each generation paid for the consumption of the school over time.

Since then, I have figured out that the politicians figured out that the easiest biggest way to cheat on the constraint against borrowing on the operating budget was to underfund their pension plans.”

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions


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