Pension report misses obvious causes of underfunding

Yet another right-wing organization is attacking public employees and their pay. This time, it’s Citizens Against Government Waste, a corporate front for tobacco companies, defense contractors, Microsoft, and anyone interested in contracting out government services. Today, they issued a report card at the National Press Club that purports to grade states on public employee pay and argued that overpayments are the cause of unfunded pension liabilities.

These claims are bunk, and study after study has rebutted similar claims. If anything, public-sector workers, most of whom have college degrees or higher, are somewhat underpaid compared to comparable private-sector workers. EPI collected a series of such reports in Jan. 2011, but this has also been the finding of research from the Center for Retirement Research at Boston College, the National Institute on Retirement Security, and the Center for Economic and Policy Research.

The CAGW paper also addresses public employee pension plans. Why are these plans underfunded? The biggest single reason is the stock market collapse of 2007–09. The Center for Retirement Research’s Public Plan Database shows that as recently as 1999, the plans were overfunded on average and were still 88 percent funded in 2007 before the stock market slid into the abyss. Experts say that a healthy pension system should be at least 80 percent funded. By 2009, public plans were only 78 percent funded.

The other big reason for poor funding is the political and moral failure of politicians to make the contributions that are required every year. Rather than treat pensions as an obligation, many elected officials failed to make some or all of the actuarially required contribution (ARC) during the bull market years of the last decade, with the total amount paid as a percent of the ARC falling from 100 percent in 2001 to 83 percent in 2006, according to CRR. Even in 2009, after the bottom fell out of the market, 40 percent of plans failed to pay in their full ARC.

Right-wing, anti-government groups want people to think that there is a tie between unfunded pension liabilities and pay levels of the employees. But funding problems are worse in Oklahoma and Kentucky than in Texas or New York, even though CAGW says public employee pay is closer to parity in the more poorly funded states. The real problems are the nation’s sputtering economy and the past failure of politicians to meet their obligations. Of the most underfunded plans in the CRR database (those with funded ratios less than 70 percent), the vast majority (nine out of 10) went through a period over the past decade where employers contributed less than 100 percent of the ARC, in many cases significantly less. Some if not all of the rest were underfunded in previous decades.