Funding Public Pensions: Is full pension funding a misguided goal?

Source: Tom Sgouros, University of California – Berkeley, Haas Institute for a Fair and Inclusive Society, 2017

Public pension systems across the United States are, and have been, in crisis. But, to a larger extent than is widely acknowledged, the crisis is the result of the accounting rules governing both these plans and the governments that sponsor them. These rules are designed to insure against risks that public pensions systems do not face, while simultaneously failing to insure against the risks they do face. The rules also encourage “reforms” that frequently do not improve the financial situation of a given pension system. This is not just deplorable, but a recipe for making a bad situation worse—precisely what we’ve seen over the past few decades. A hybrid accounting system could provide a more accurate picture of a system’s financial health while reducing the waste of overfunding. It could relieve unnecessary financial pressures on thousands of governments across the nation while still preserving the integrity of their pension systems.