The public pension problem

Alabama Scene



Large investment losses sustained by public pension funds throughout the nation are forcing many states to spend more taxpayer dollars to keep their systems solvent, boost the retirement age for new hires, and seek higher contributions from employees.

The Center for Retirement Research at Boston College reports that public pensions need $270 billion in additional contributions over the next four years and more than $100 billion annually over the next two decades in order to meet their obligations to retirees.

But the market value of public pension fund assets has declined by a third, from a peak of about $3.3 trillion in the fall of 2007 to $2.4 trillion at the beginning of 2010, according to the Retirement Administrators Association.

Alabama’s public retirement funds did not escape the economic downturn and some unexpected losses may have increased the severity of the investment problems, resulting in one of the lowest investment returns in the nation during the past decade.

Reporter David White writes in The Birmingham

that the investment returns of Alabama’s two largest public pension funds lagged behind 90 percent of the nation’s public pension funds in a survey by State Street Investments, a national financial services company. The Teachers’ Retirement System, which on Sept. 30, 2010, had $17 billion in stocks, bonds, and other assets, posted an investment return of 8.4 percent for the year. The Employees’ Retirement System, which on the same date had $8.2 billion in assets, posted an investment return of 8.5 percent for the year.

The State Street survey showed the median gain for 67 public systems, each with more than $1 billion in assets, was 10.7 percent, or better than 2 percent higher than last year’s return for both Alabama systems. The same pattern has been true in four other State Street surveys over the past decade.

“The poor overall peer group performance, for which I am solely responsible, was somewhat due to the lower valuations on ownership of newspapers, television stations, and real estate,” RSA CEO David Bronner wrote in a report to TRS and ERS board members earlier this month.

Because pension systems usually involve long-term obligations and investments, there appears to be no immediate risk that states will be unable to pay retiree benefits. But cost increases could squeeze public systems for years to come, according to several pension system analysts. I am sure Gov.- Elect Robert Bentley has taken note of the problems at RSA.

The Social Security issue

Many states, like Alabama, are constitutionally required to honor their pension promises and most are looking for other ways to decrease their vulnerability during downturns. For some states, the surprising answer may be Social Security.

Maine, which excludes most of its public employees from Social Security and has underfunded its public pensions, is looking at shifting public workers into the Social Security system. The shift would be accompanied by a reduction in the state-sponsored pension benefit contributions to a level that would still provide equivalent retirement benefits for new employees according to a report from The New America Foundation.

Currently, the 13 states that exclude some or most of their public workers from Social Security bear the full risk of stock market downturns that wreak havoc on pension funds. Note: Alabama pays public safety officers a higher pension rate but excludes them from Social Security. All other employees, teachers, and officials earn Social Security benefits.

The New America Foundation
report suggests the vulnerability to market fluctuations makes a compelling case for putting all employees into Social Security and even using Social Security as a vehicle to provide most, if not all, of the recommended 70-80 percent of pre-retirement income needed for a comfortable retirement.

According to the report, a movement of public workers from those 13 states into Social Security could help to do several things. First, it would protect both state budgets and workers’ retirement savings from market volatility. Second, the inclusion of public workers would expand the numbers paying into the Social Security system and could ease some of the financial stresses associated with the retirement of baby boomers. Bob Martin is editor and publisher of The
Montgomery Independent. E-mail him