Transcript The Future of Public Pensions Retirement Issues for the 21stCentury National Press Foundation Washington, D.C. June 13, 2011 Diane Oakley Executive Director National Institute on Retirement Security www.nirsonline.org.

The Future of Public Pensions
Retirement Issues for the 21stCentury
National Press Foundation
Washington, D.C.
June 13, 2011
Diane Oakley
Executive Director
National Institute on Retirement Security
www.nirsonline.org
Why Increased Focus on Public Sector &
Pensions?
•
Seen inaccurate assertions in
outsized growth of public sector
employment.
•
Middle class jobs in the private
sector are disappearing.
•
The share of middle income jobs in
the U.S. fallen from 52% in 1980 to
42% in 2010.
•
Middle income jobs have been
replaced by low income jobs, which
now make up 41% of total
employment.
Source: New American Foundation, Bureau of Labor Statistics, Westwood Capital
Private Sector: Lower Income Now,
Less Retirement Security Later
Private Sector Workers Participating in Employer Based
Retirement Plan by Plan Type, 1979-2008 (all workers)
Source: New American Foundation, Bureau of
Labor Statistics, Westwood Capital
Source: New American Foundation, DOL,
PBGC, EBRI
Wall Street Meltdown Dealt
Severe Blow to Middle Class
• Household net worth declined
from $65.7 trillion in the second
quarter of 2007 to $56.8 trillion in
the fourth quarter of 2010.
• Wealth recovered $8.1 trillion
since the first quarter of 2009,
due mostly to recovery of stock
prices.
Source: New American Foundation, Bureau of Economic Analysis
Already, Severe Private Sector
Shortfall in Retirement Savings
•The median value of retirement
savings for retirees is $45,000
•The average retiree has a
retirement savings shortfall of
$47,732, with larger shortfalls
among low-income Americans
•Many Americans were relying
on rising home values to finance
their retirement and have under
saved.
Great Recession Fallout on Middle
Class: Home Equity & Wealth
•
Home equity makes up a greater share
of wealth for the middle class than for
wealthy families.
•
For families up to 90th percentile of net
worth, home value makes up 50% of
worth.
•
However, significant decline since 2007,
Case Shiller Home Price Index declined
by 30%, could fall another 10-20%.
•
Don’t forget – 23% of all residential
mortgages underwater.
Source: New American Foundation, Kennickell (2009)
Public Pensions: Strong Financials for
Most Plans Going into Financial Crisis
Aggregate State and local pension funding level assets
as a share of trust fund liabilities (percent)
120
103
100
96
85
91
88
90
85
88
87
86
88
84
79
80
77
60
40
20
0
1994
1996
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999)
2010
Vast Majority of Public Plans Well Funded
Distribution of Funded Ratios for 126 Largest State, Local Pensions, 2010
30%
25%
20%
15%
10%
5%
0%
40-49
50-59
60-69
70-79
80-89
Funding Ratio (Percent)
Source: Center for Retirement Research, Boston College
90-99
100+
Public Pensions Showing Strong Recovery
Change in Combined Assets of State & Local Government Pensions:
2003 – 2010
Source: National Association of State Retirement Administrators
Strong Investment Returns:
Exceed 8% Over Two Decades
Median annualized public pension fund investment returns
for periods ended 12/31/10
14
13.1
12
10
8.8
8.8
20
25
8
6
5
4.5
4
2
0.4
0
1
3
5
10
Years ended as of 12/31/10
Source: NASRA based on Callan Associates Data
Historical Snapshot: Investment Returns
Source: Gabriel, Roeder, Smith & Company
Using Theory Rather Than Reality Artificially
Inflates Public Pension Costs
Risk-Free Rate Leads to Increased Costs
Source: Government Finance Review, February 2011
Using Theory Rather Than Reality Artificially
Creates Surplus
Risk-Free Rate Leads to Excess Funding
Source: Government Finance Review, February 2011
Public Pensions Are Small Portion
of State/Local Budgets
Employer (taxpayer) contributions as a percentage
of all state and local government spending, FY 08
Source: U.S. Census Bureau
On Average, Public Pension Benefits Modest,
With 30% of Workers Not Eligible for Social Security
Average Monthly Public Pension Benefit, 1993-2008
(2008 Constant Dollars)
2,000
1,888
1,900
1,871
1,847
1,800
1,865
1,852
1,871
1,775
1,716
1,700
1,600
1,557
1,500
1,584
1,497
1,488
1,430
1,400
1,377
1,326
1,306
1,300
1,200
1,100
1,000
1993
1994
1995
1996
1997
Source: U.S. Census Bureau
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Public Pensions Typically Are Shared
Funding Responsibility
Employee and Employer Pension Contributions, 1982 to 2009
Source: U.S. Census Bureau
Public Pensions Implementing Changes
to Ensure Long-Term Sustainability
Source: Government Finance Review, February 2011
DB to DC Switch Not a Viable Solution
• By itself, freezing plan does nothing
to close and funding shortfalls
• Freezing plan undermines the
economics of the plan by starving it
of new entrants
• Because of accounting regs, plan
costs can actually increase
• Undermines retirement readiness
Source: National Institute on Retirement Security, Look Before You Leap
Pensions Make Sense for Public Sector
Sector Employers, Taxpayers
“State and local governments also have a strong
comparative advantage relative to private industry in
offering pension benefits.
Since many of the most common government jobs—
firefighter, police officer, corrections officer, regulatory
overseer—have no direct private sector analog, the
lifetime-with-one employer career path scorned by many
in the private sector makes a lot of sense for government
employees.”
Eli Lehrer, Heartland Institute, Weekly Standard, March 28, 2011
American Retirement Panic Attack
84% Americans Concerned Current Economic
Conditions Hurt Retirement
Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A
Roadmap for Policymakers
Private Sector Wants Pensions
81% of Americans Say They Need Pension For
Independence, Self-Reliance
Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A
Roadmap for Policymakers
Regulations, Funding Volatility Kill
Private Sector Pensions - Not Costs
Regulations, Funding Volatility Kill
Private Sector Pensions - Not Costs
Corporate vs. Public Pension Funding Levels, Costs
Comparison of corporate and public
pension funding levels, 2000 to 2010
Funding
Level
Comparison of change from prior year in corporate
and public pension contributions, 1989 to 2009
80%
*
120%
60%
Corporate
40%
Corporate
100%
20%
Public
0%
Public
80%
-20%
00
01
02
03
Wilshire, Milliman, and
Public Fund Survey
04
05
06
07
08
09
10*
*Estimate
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
US Dept of Labor,
*Estimate
US Census Bureau,
Milliman
Pensions Most Economically Efficient
Retirement Plan: HALF the cost
Cost of DB and DC Plan as % of Payroll
25%
20%
Lower Returns/Higher Fees
46%
Savings
Less Balanced Portfolio
15%
No Longevity Risk Pooling
DB Cost
10%
5%
0%
12.5%
22.9%
DB Plan
DC Plan
Source: National Institute on Retirement Security, A Better Bang for the Buck
The Real Retirement Issue?
Underfunded Individual Accounts
Source: Michael Kitces, The Nerd’s Eye View in The New York Times
Future Outlook?
• Public pensions will continue to recover.
• States will continue to implement changes to ensure
long-term pension sustainability.
• State & local government will continue to offer
pensions with supplemental DCs.
• Watch for NIRS forthcoming study on public pension
sustainability.
Additional Resources
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American Benefits Council – Lynn Dudley
Boston College Center for Retirement Research – Alicia Munnell
Chamber of Commerce – Aliya Wong
Center on Budget and Policy Priorities – Elizabeth Liz McNichol
Center for Economic & Policy Research – Dean Baker
Center for State & Local Govt. Excellence – Beth Keller
Groom Law Group – Ian Lanoff
ERISA Industry Committee – Mark Ugoretz
Employee Benefits Research Institute– Dallas Salisbury
Government Accountability Office – Frank Todisco
Heritage Foundation – David John
National Assn. of State Retirement Administrators – Keith Brainard
Penn State University – Ron Gebhardtsbauer
Segal Company – Cathie Eitelberg
University of Massachusetts – Christian Weller
Yale University – Jacob Hacker
www.nirsonline.org
Diane Oakley
202.457.8190
[email protected]