There’s an oft repeated myth being fed by many that claims the defined benefit pension plans available to most public employees are going bankrupt.
While a new report by the Pew Center for the States feeds those myths, Pew’s research paints a false picture of pensions. Here are five oft-peddled myths about public pensions followed by the facts.
1. Pensions are going bankrupt.
The methods used to calculate a pension system’s funding level are quite complicated and convoluted, which has enabled detractors to point to the funds in a few states — Illinois, Rhode Island, Connecticut and Kentucky — where funding shortfalls are notably higher.
Pew’s “new” report relies on data from 2010, but that snapshot gives an inaccurate portrayal of the current fiscal health of pensions. In 2010, when the recovery was not as far along as it is today, 16 states were above the threshold that Pew says is necessary to qualify for good fiscal health. The number of states meeting that threshold today is probably much higher. For example, in Wisconsin the primary pension fund is 99.8 percent funded today. In the state of Washington, pensions are 119 percent funded today. In North Carolina, pensions are 100 percent funded today. Perhaps most important, pensions will continue to recover steadily as markets rebound.
2. States are facing an “unfunded liability” in excess of anywhere from $3 trillion to $757 billion.
The concept of an “unfunded liability” is misleading because pension benefits are paid out over decades. A mortgage represents a good analogy. Imagine newlyweds, both of whom work, buying a $300,000 home and putting $20,000 down. The $280,000 they owe represents an “unfunded liability,” but like pensions, that money is not due all at once. It is due over 30 years, under the terms of a typical loan agreement.
Opponents of public employee pensions have skillfully portrayed pension liabilities as a bill that is due today. If homeowners had to pay the full cost of their home at the time of purchase, 99 percent of us would be renting. But homeowners don’t have to pay for the homes all at once, so it’s very misleading to portray pension funds in that light because pensions are paid to retirees over many decades.
3. States can no longer afford to pay benefits.
Payments to pension systems account for less than three percent of state budgets. Most of the funds in pension plans are not even provided by taxpayers — two-thirds of all pension assets are contributed by employees or earned on investments.
Where pensions are underfunded, it’s overwhelmingly because of the recession and because states took “pension holidays,” which means politicians declined to make their state or locality’s annual contribution — breaking a promise to the public servants of that state and in a bad faith effort as the fiscal stewards of taxpayer dollars. Had they simply honored their commitments when times were good, virtually no state pension system would have unfunded pension liabilities that raise concerns.
This approach has worked for opponents of pensions because it allows them to shift blame to workers, but it does not change the fact that it advocates allowing states to ignore their responsibility to the people who perform the work to protect the public, teach our children and keep the state providing many other valuable services to its citizens.
4. Public employee benefits are overly generous.
Since pensions are now virtually non-existent in the private sector, and because the recession decimated the nest eggs of everyone with money in the stock market, opponents of defined benefit pensions have gained traction with this argument by creating and fostering pension envy.
The story that isn’t told is that the pensions public employees receive, in most cases, are the only source of income those workers receive in retirement since most are not allowed to collect Social Security. And the median benefit of those receiving a pension paid by a public employer is $23,407, according to the National Institute for Retirement Security.
The hope is that their pension gives the average public worker the ability to pay their basic bills, but they definitely aren’t getting rich in their old age.
CEO pay provides a better example of overly generous pay. Apple CEO Tim Cook earned $900,000 in pay and performance benefits in 2011 and received restricted stock worth $376 million that vests in 2016 and 2021. CEOs of the S&P 500 Index companies earned 380 times the salary of an average worker in 2011, according to the AFL-CIO’s Executive Paywatch study.
5. We can fix the pension system by converting to 401(k)-style defined contribution plans.
There is a well-financed effort to force 401(k) plans as the solution because Wall Street firms stand to earn billions of dollars in fees if pensions are converted to 401(k)s.
But the momentum of that effort is dwindling because 401(k)s have provided investors with a paltry return over time. Think about what has happened to your own 401(k) since 2008 and whether the money in that account would be enough to sustain you in retirement.
A 60-year-old who worked for 30 years has an average 401(k) account balance of $172,555, according to the Employee Benefits Research Institute. That will provide retirement income of only $575.18 per month. It would take a 401(k) account balance of $1,000,000 to provide $40,000 annually over one’s lifetime. To achieve a $1,000,000 account balance, you would need to contribute $1,000 a month every month for 30 years and earn a 6 percent return [after fees]. With an estimated 20 million Americans unemployed or underemployed and with real wages stagnant for decades — average hourly earnings for all private-sector production and nonsupervisory workers across the economy have risen just 5.3% to $19.72 since 2000, according to the Bureau of Labor Statistics — those who work for a living in this country over the past 30 years, not many have $1,000 to save every month after paying their bills.
The real retirement crisis is not in the public sector. It is in the private sector. The average 401(k) balance today is just $71,500, according to Fidelity Investments. Americans whose retirement security relies on Social Security supplemented by such small balances in 401(k)s must consider how they will avoid falling into poverty in their retirement years and states will need to figure out how they will provide welfare to those who do.
401(k)s were always intended to supplement — not replace — one’s retirement income. About 10,000 Americans a day are turning 65 years old, according to the Pew Center for the States. While Wall Street’s 401(k) plans have done nothing to help retirees enjoy their golden years, defined benefit plans are the best way to support retirees and allow them to continue to contribute to their local economies.