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Monday, April 13, 2009

Pension week: The national pension crisis

It's Pension Week here at “It's Our Money”! Over the next few days, we'll be taking an in-depth look at the pension crisis and try to make sense of what it all means for taxpayers. We're focusing on this topic  because City Council will hold the budget hearing for the Board of Pension and Retirement on Wednesday.

Today, we'll provide an overview of the national crisis facing public pension funds. Across the country, state and local governments are struggling to provide retirement benefits for their workers. A combination of factors-- including staggering investment losses, overly generous benefits, and poor management decisions-- have created the “perfect storm” for publicly funded pension plans.

So, exactly what kind of funds are we talking about? Public pension plans cover all types of government workers, from teachers to sanitation workers to firefighters. Workers pay a portion of their salary into the plan and that amount is matched by their employer. That money is then invested, usually in the stock market. At the time of their retirement, the employee begins to receive monthly payments based on their length of service. According to the Center for Retirement Research at Boston College, the total assets for public pension plans is about $2 trillion and cover 22 million workers.

However, those assets have taken a major beating due to the financial crisis. Since most of the money is tied up  on Wall Street, public pension systems have decreased in value as the stock market tanked. A study released last month by Northern Trust, an investment advisor, found that the average state pension fund lost 14.8 percent during the past year. That number is expected to double as the losses from the last few months are tallied. Pension fund losses are driving budget woes in states and cities across the country, as governments are forced to contribute more money to keep funds afloat.

However, this is not a crisis that came from nowhere. Several factors unrelated to the dramatic decline on Wall Street helped publicly funded pension plans reach the tipping point.

For many years, public sector workers made a trade off: they would get smaller paychecks than those in the private sector, but would receive better benefits and have more job security. In exchange for providing good healthcare and pension plans, governments could count on stability in their workforce. A report on public sector retirement benefits from the Pew Center on the States found that the medium pension benefit for private companies in 2005 was $7,692, while public sector workers received $17,640. As many baby boomers approach retirement age, the cost of providing these benefits has increased.

The crisis  not just the amount of money-- it's also about the type of pension plan offered to public sector workers. About 90% of public employees are in defined benefit plans, which means their pension payment is guaranteed regardless of the performance of the pension fund. That means state and local government have been required to pay the same amount to retirees, even as investments have tanked. In comparison, only about 20% of private sector workers are in guaranteed benefit plans.   

Finally, poor financial management over many years has hurt many public pension funds. During boom times, many state and local governments relied on investments to keep pension plans healthy. Investment managers sought higher and higher returns, without any worry that the stock market could decline. In fact, a new report from the Employee Benefit Research Institute charges that public pension funds were actually encouraged by accounting rules to make  risky investments to drive up short-term profits.

Since nearly all pension funds are heavily invested in the stock market, the economic crisis has been an equal opportunity offender. In fact, the widespread nature of the problem has generated talk that public pension funds could be the next target for a federal bailout. Since billions of dollars are being diverted from state and local budgets to pay for the shortfalls, helping these funds could be a form of economic stimulus. Ultimately, the health of these pension funds is reliant on the performance of the stock market. If Wall Street starts to recover, it will do a lot to ease the burden on officials struggling to deal with the pension crisis.
 
Posted by Ben Waxman @ 3:53 PM  Permalink | 2 comments
Comments   
  • 0 like this / 0 don't   •   Posted 4:29 PM, 04/13/2009
    Waxman does a good short overview here about a problem that is perpetual in Philly government -- the city pension is not getting the job done, and no one has the courage to fix it. There's only one way to fix the city pension -- increase contributions by city employees, stop creating so many city pension eligible employees, and mandate the city contribution portion even in "hard times" like when Council is forced to give up cars and DROP.
    — CleanupPhilly
  • 0 like this / 0 don't   •   Posted 11:00 PM, 04/13/2009
    I have to disagree. Nobody was saying anything when the city was mot making the proper contributions as required to the fund. Nobody was saying anything when the city was borrowing from the fund and now that the stock market isn't performing and the fund is underfunded, the answer is to make the city workers pay more into the fund. Even when the city was not contributing thier share to the fund, city employees had thier contributions taken out every paycheck. That is why the pension fund is not where it should be and the city has to make such a large contribution. They didn't make the contributions when they had the money, and now that it is due, they are blaming the city workers for its underfunding.
    — jn3


2 comments
About It's Our Money
Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.




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Juliana Reyes:
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