What Happened?
New York City Mayor Bloomberg has called projected pension fund returns indefensible, arguing that relying on a forecast of 8 percent or even 7 percent is completely unrealistic. His argument is accurate in terms of recent performance, but has massive implications; pension models are premised on minimum returns, and decreasing assumptions yields billions of dollars in taxpayer obligations.
The Problem
State governments have been slow to recognize—if at all—that risks in the global financial markets have negatively impacted pension returns. In addition, states for the most part have not acknowledged that municipal employees are living longer, are reporting more disabilities, and are doing so at greater base compensation levels.
The Solutions
Simply lowering pension return projections won’t fix the problem, as doing so creates even larger unfunded pension obligation. Typically, when projections are lowered, funding schedules are pushed out even further, which doesn’t solve the core problem.
According to experts, a number of steps have been outlined, such as:
- Actuarial tables need to be updated to reflect the fact that individuals are living longer;
- Retirement ages need to be increased, in some cases significantly;
- Caps need to be placed on base compensation levels;
- New employees should be placed in 401k-style defined compensation plans, or hybrid plans where risk is shared;
- Caps needs to be placed on the amount employees can receive annually;
- Cost-of-living adjustments need to be used more cautiously, or only offered when plans are funded at a minimum level. See this related article on CoLA cuts in Rhode Island
Related Coverage
As recently covered in Gov1, San Jose and San Diego recently passed measures reforming pensions, and the legislature in Illinois is also considering pension reform. Additional coverage on pensions can be found here.