In the conversation around public pensions, there are a lot of myths that get repeated over and over again. We’re going to dispel three of the most common myths here.
Myth #1: Pensions are Underfunded and Unsustainable
Fact: Most public pensions are back on sound financial footing after the Great Recession and on a path to full funding. Recently, the Center for Retirement Research at Boston College predicted public pensions would achieve sustainable funding levels by 2018. One of the most important indicators of a healthy pension fund is a state’s actuarially required contribution (ARC). The ARC represents the amount of money a state needs to contribute each year in order to maintain a balance between money coming in and money going out. This helpful chart from the National Association of State Retirement Administrators shows that the majority of states have been contributing most of their ARC.
Myth #2: States are Abandoning Defined Benefit Pensions
Fact: Far from abandoning traditional defined benefit pension plans, states in recent years have rejected bills that would convert their pension systems to riskier 401(k)-style accounts. Not only that, but certain states are considering moving back to defined benefit plans. In Alaska, a state that moved to a defined contribution system with disastrous consequences, State Senator Bill Wielechowski has introduced legislation to return to a defined benefit system. In a recent editorial in the Greeley Tribune, he warns other states not to follow Alaska’s path:
“…legislators should heed the warnings of states such as of Alaska, where we’ve learned 401(k)-style plans not only diminish recruitment, retention and retirement security, but actually cost the state more. When states act responsibly, Defined Benefit pension plans are the most cost-effective way to provide workers with retirement security… Recognizing the negative effects of retreating from a Defined Benefit pension plan, we have also introduced legislation to reinstate this option.”
Myth #3: 401(k)-style Plans Offer a Secure Retirement to Workers
Fact: 401(k)-style defined contribution plans have failed to live up to their hype. Instead of assuring a safe and secure retirement for workers, defined contribution plans can offer only a fraction of the value of a defined benefit plan, often at much higher cost. Under a defined contribution scheme, retirement resources are not pooled, not professionally managed, and workers must determine how much to contribute to their retirement. Study after study has shown that workers fail to plan adequately for retirement. Defined contribution plans also leave their participants exposed to a great amount of market risk. During the Great Recession, for example, the value of many investments in 401(k) accounts was wiped out by the stock market crash. This left many retirees with no savings for retirement, even if they had been saving for decades.
Reality: Defined benefit pension plans afford the safest and most secure retirement for teachers, firefighters, nurses and other public employees who spend decades working for the public good and have earned their retirement.