Category Archives: Pensions

“Why Don’t Some States and Localities Pay Their Required Pension Contributions?”

Source: Alicia H. Munnell, Kelly Haverstick, Jean-Pierre Aubry, and Alex Golub-Sass, Center for Retirement Research at Boston College, Issue in Brief, SLP #7, May 2008

The brief’s key findings are:
• Over 40 percent of plans in our sample failed to make their annual required contribution (ARC) in 2006.
• Two thirds of these plans faced legal constraints on their contributions, but many are gradually adjusting their limits.
• For the unconstrained plans, the following factors are associated with a failure to make the ARC:

o The plan uses a less rigorous cost method;
o The plan is large; and
o The plan is in a state with a relatively high debt burden.

Why Does Funding Status Vary Among State and Local Plans?

Source: Alicia H. Munnell, Kelly Haverstick, and Jean-Pierre Aubry, Center for Retirement Research at Boston College, State and Local Pension Plans #6, May 2008

From the summary:
While state and local pensions as a group are about as well funded as plans in the private sector, significant variation exists. More than 60 percent are adequately funded, but almost 40 percent are not. Low levels of funding means that future taxpayers will have to pay the cost of unfunded pension promises, as well as the unfunded costs of retiree health insurance. Alternatively, if taxpayers balk at covering these pension commitments, future beneficiaries risk losing benefits, such as ad hoc cost-of-living increases.

Pension Tension: Very few states hold all the assets they should for future retirement and health care benefits

Source: Ron Snell, State Legislatures, May 2008

… How well are states prepared to meet the retirement commitments they have made?

In some ways, very well. State and local governments are custodians of an enormous pool of assets safeguarded for future retirees–$3.24 trillion in cash and investments at the end of last October. In the fiscal year that ended on June 30, 2007, state and local governments and their employees contributed $91 billion to retirement funds, and the funds earned more than $265 billion on their investments. Funding levels generally have been improving in recent years, as investments have recovered from their post-2000 lows.

In other ways, states are not so well prepared. Very few states hold all the assets they should have on hand to prepare for future retirement benefits. All states invest in order to meet future obligations, but even allowing for future investment return, some state trust funds hold less than half what they should. And a substantial number are below the 80 percent figure that the public retirement community regards as adequate. The Pew Center on the States recently estimated that state pension systems (not including locally run systems) are about $360 billion short of the assets they should ideally hold for future retirees.

Full text

The Miracle of Funding by State and Local Pension Plans

Source: Alicia H. Munnell, Kelly Haverstick, Steven A. Sass and Jean-Pierre Aubry, Center for State and Local Government Excellence

The brief’s key findings are:
* State and local pension plans, overall, are as well funded as private plans, with assets covering nearly 90 percent of liabilities.
* This outcome is striking, even “miraculous,” given that public plans:
– tend to pay larger benefits;
– use a more stringent funding yardstick; and
– are not covered by any national legislation that mandate funding standards.
* Assets per worker increased markedly in the1990s after states and localities responded to new standards issued by the Government Accounting Standards Board.

Full report

Pension Reform in the United States: Lessons from the Italian Experience

Source: Raymond L. Hogler and Herbert Hunt III, Labor Law Journal, Spring 2008

This article examines the Italian pension reforms and draws insights from the Italian experience that could be useful in developing a program in the U.S. We argue that both process and substance are important in dealing with pension issues. An adequate process ensures that political interest groups are sufficiently engaged to support the idea of reform, that a sufficient time frame exists for citizens to adapt to the changes, and that the overall direction of change remains consistent with reform, even if minor adjustments are made in the implementation. The substantive concepts from the Italian model involve a compulsory private savings program, an integrated approach to health care, and a political commitment forceful and visionary enough to rise above ideological squabbling.

Why Have Some States Introduced Defined Contribution Plans?

Source: Alicia H. Munnell, Alex Golub-Sass, Kelly Haverstick, Mauricio Soto, and Gregory Wiles, Center for Retirement Research at Boston College, SLP#3, January 2008

Although defined benefit plans dominate the state and local sector, in the last decade twelve states have introduced some form of defined contribution plan. The degree of compulsion varies among these states from mandatory participation in a defined contribution plan for new employees, to mandatory participation in both a defined benefit and defined contribution plan, to having the defined contribution plan only as an option…

…The most important explanation turns out to be political rather than economic. States where the same political party controlled the legislature and governorship and that party was republican were the most likely to introduce a defined contribution plan. The results also suggest that plans with a high percentage of union members and those with sizable employee contributions are less likely to add a defined contribution plan component. Interestingly, states without Social Security coverage, which provides a basic level of defined benefit protection, are not deterred from shifting to a mandatory defined contribution plan.

What Do We Know About the Universe of State and Local Plans

Source: Alicia H. Munnell, Kelly Haverstick, Mauricio Soto, and Jean-Pierre Aubry, Center for Retirement Research at Boston College, SLP#4, March 2008

From the summary:
Several surveys report data on public pension plans, but they tend to focus on the 120 major state systems and some include a sampling of locally administered plans. The Census of Governments is the only source that reports on the entire universe of state administered plans, in addition to more than 2,000 locally administered plans. This brief describes that population, reports on the investment performance of different types of public plans, and compares the investment performance of public and private plans.

State and Local Government Retiree Benefits: Current Funded Status of Pension and Health Benefits, January 29, 2008

Source: Government Accountability Office, GAO-08-223, January 2008

Pension and other retiree benefits for state and local government employees represent liabilities for state and local governments and ultimately a burden for state and local taxpayers. Since 1986, accounting standards have required state and local governments to report their unfunded pension liabilities. Recently, however, standards changed and now call for governments also to report retiree health liabilities.

Upgrading The Investment Policy Framework Of Public Pension Funds

Source: Dimitri Vittas, Gregorio Impavido, Ronan O’Connor, World Bank Policy Research Working Papers, WPS4499, January 2008

From the summary:
Public pension funds have the potential to benefit from low operating costs because they enjoy economies of scale and avoid large marketing costs. But this important advantage has in most countries been dissipated by poor investment performance. The latter has been attributed to a weak governance structure, lack of independence from government interference, and a low level of transparency and public accountability. Recent years have witnessed the creation of new public pension funds in several countries, and the modernization of existing ones in others, with special emphasis placed on upgrading their investment policy framework and strengthening their governance structure. This paper focuses on the experience of four new public pension funds that have been created in Norway, Canada, Ireland and New Zealand. The paper discusses the safeguards that have been introduced to ensure their independence and their insulation from political pressures. It also reviews their performance and their evolving investment strategies. All four funds started with the romantic idea of operating as ‘managers of managers’ and focusing on external passive management but their strategies have progressively evolved to embrace internal active management and significant investments in alternative asset classes. The paper draws lessons for other countries that wish to modernize their public pension funds.

Issues Facing State And Local Government Pensions

Source: Rick Mattoon, Economic Perspectives, Vol. 31 3rd Quarter, 2007

At the turn of the century, many U.S. public pension funds faced a “perfect storm,” brought about by the confluence of unfavorable demographics, low interest rates that increased the present value of liabilities, declining investment returns from the stock market, and swelling ranks of pension benefit claimants. As state and local governments try to address these challenges and plan for the future, some analysts have begun to question whether traditional notions of defined benefit pension plans (where the retiree is guaranteed a monthly income for life) can be sustained. Many private sector firms have abandoned these traditional pensions in favor of defined contribution plans, whereby individuals are responsible for ensuring that their retirement plans are adequate to meet their retirement needs.