If you are a long time reader of Defined Benefit, then you know that pensions remain the best way for working families to save for retirement. Pensions are more cost-effective than defined contribution 401(k)-style plans and provide more income in retirement than those plans. However, opponents of pensions will often claim that pensions are too expensive and that they are busting state budgets. A new report sheds some light on that claim.
The new report from the National Association of State Retirement Administrators examines the percentage of direct general spending that state and local governments contribute toward pensions. The report finds that the nationwide average is 4.1 percent (as of FY2013). This is well within the historical range and lower than the all-time high of 5 percent. Despite the claims of pension opponents, the cost of providing pensions is a relatively small amount of overall state budgets.
Obviously, some states contribute a greater percentage of their budget than others. The numbers range from a low of 1.63 percent in North Dakota to a high of 7.61 percent in Illinois. It should be pointed out, though, that the majority of Illinois public employees do not participate in Social Security; therefore, their public pension is the only thing they have to rely on in retirement, aside from personal savings. If Illinois did participate in Social Security, then it would be paying those contributions in addition to the contributions to the pension systems. Furthermore, Illinois politicians notoriously underfunded their pensions for decades, so now the system must pay more to make up for past underfunding.
Another recent report, from the Center for Retirement Research at Boston College, finds that the funded status of public pension plans improved from 2014 to 2015. That report finds that the average funded ratio improved to 74 percent last year. It also found that states increased their payments to 91 percent of the required amount (from 86 percent the year before). This is key to the long-term success of public pension plans. Contributing the full, annual required amount is the most important thing a state government can do each year to ensure the success of its pensions. It is good to see states maintain their commitment to pensions by adequately funding them each year.
These two reports confirm that states are sticking with pensions. States are, on average, contributing close to the full, annual required amount. This is helping pension plans improve their funded status. And those contributions from state government remain a relatively small amount of overall government spending. All in all, pensions are a good investment by states for the retirement security of working families.