Strong stock market doesn’t hide pension problem

commentary /// Funding public retirement


There’s no question that many investors will see returns approaching or even exceeding double-digit levels for the recently completed fiscal year, as the stock market has done exceedingly well in recent months.

So where’s the pension crisis?

In reality, it could take decades to make up not only for past years of poor stockmarket performance, but for the massive and relentless retroactive pension increases that state and municipal governments have been granting their workers since 1999.

Indeed, private 401(k) retirement plans and public “defined benefit” plans both are dependent on investment returns, but in significantly different ways. In a 401(k) plan, the employee contributes a set amount of money to the account, to which some employers offer full or partial matches. If the market soars, the employee’s nest egg grows. If it falls, so does the account balance. There is no unfunded liability because the employee isn’t promised any specified amount of retirement income.

In the public sector, employees are guaranteed an annual benefit based on a formula. California police and fire officials, for instance, typically receive 90 percent or more of their final years’ pay until they and their spouse pass away. Nothing short of a municipal bankruptcy can legally reduce what they receive. Even if the stock market does poorly and liabilities increase, the retirement pay stays the same.

That’s why CalPERS and other unioncontrolled pension funds have a vested interest in celebrating up years and downplaying bad years. Good years let them hide the amount of taxpayer-backed debt that’s been accumulated.

But there is a steep cost to this approach. When public agencies spend more on pensions, they must cut services or raise taxes.

Even a year of good returns will do little to correct the vast level of pension underfunding. After this year’s returns, “the nation’s largest public pension system will still be seriously underfunded,” said Ed Mendel in a recent Calpensions article.

CalPERS is now only 65 percent funded and “(it) is worried about a downturn that might drop funding below 50 percent, a red line actuaries think makes recovery very difficult,” Mendel said

Plus, it is unrealistic to bank on this year’s stock-market surge to be followed by additional surges. It’s more realistic to expect downturns rather than unending boom years.

Strong returns are nice, but can’t be expected to last.

Ed Ring’s May 2016 California Policy Center analysis concluded that public pension funds “will be hit much harder in a downturn than private pension funds” because they “are not subject to the same rules that private pension funds have to adhere to.”

And because unions continue to control the state Capitol and many local governments, we will see a continued ratcheting of compensation levels.

By all means, let’s toast the favorable stock-market returns, but a more reasonable approach would be to acknowledge that the pension crisis continues to be as pressing as ever. Let’s not be misled by those with a vested interest in downplaying the problem.

Steven Greenhut is a contributing editor for the California Policy Center. He is Western region director for the R Street Institute. Email him at sgreenhut@rstreet.org.