A bureaucratic twist to the public pension crisis

We've spoken several times about the crisis in public pensions that confronts this country.  It now emerges that a significant part of that crisis was caused by bureaucratic mismanagement.

The second-longest bull market in American history hasn’t stopped the deterioration of state and local pension funds, whose unfunded debt has almost quadrupled—by their own accounting—from about $360 billion in 2007 to $1.4 trillion today. Having relied on overly optimistic and inaccurate financial assumptions for decades, public pension administrators are now forced to acknowledge that the systems owe much more than previously thought. Even as local governments struggle to pay for this debt, it keeps growing.

. . .

In 2014, several communities in Illinois discovered that officials were using mortality tables from 1971, when life expectancy was much shorter, which vastly underestimated pension costs. The resulting outcry forced those communities to update their calculations, and led to average increases in costs by about 20 percent. Most state plans now use more recent numbers, but even year-to-year adjustments in mortality rates put pressure on communities already struggling to meet pension obligations. After New York State’s retirement system updated its mortality tables in 2015, for instance, localities increased their pension payments from 14.2 percent of salaries to 18.2 percent, according to S&P.

Longer lives for public employees will mean higher costs, and not just for pension plans. Many state and local governments promise to pay for the health care of their retired workers, but few have enough money set aside to do so. A recent analysis by Pew found that states spent $20 billion on retiree health care in 2015, and that, collectively, states owe nearly $700 billion in promises they’ve made to finance their workers’ health insurance in retirement. But that number is undoubtedly higher, given longer life spans.

. . .

In about half of the states, added costs from these inaccurate projections fall entirely on taxpayers. That’s because these states have laws or constitutional provisions that limit the ability of governments to alter pensions for current workers for as long as they remain employed. Among other things, governments often can’t require higher contributions from workers themselves; nor can they lower benefits. Consequently, the amount of money that local governments must pay into the system has been rising steadily. As the latest study on mortality rates shows, that trend is going to continue.

There's more at the link.

In the old days, one might have a single job from college graduation to retirement.  A teacher might accumulate 40 or 45 years of service before starting to draw a pension, and would contribute to his or her retirement fund for that long - and then, of course, they'd die within a decade or so, not drawing a pension for very long.  Nowadays, a person might turn to teaching as a second career, starting in their 40's and retiring at 65.  Others may retire as soon as they reach 20 years of service, when their pensions vest.  It's not inconceivable that a teacher retiring today might draw a pension for more than twice as long as he or she was employed as a teacher . . . and that changes the whole actuarial perspective.  Health care costs, too, are so much higher today that they drastically affect long-term financial considerations.

One would have thought that the bureaucrats administering the pension plans would have been more alert to such changes . . . but they're bureaucrats.  They push pencils, dot I's and cross T's.




Peter