The 2008 financial crisis- dubbed “The Great Recession” by many- had devastating consequences throughout the American economy. Public pension plans were among the hardest hit by the Wall Street greed that led to the crisis. Many public pensions suffered steep investment losses in the several years immediately following the financial crisis- losses they are still recovering from today. Despite those losses, public pensions are improving their funded status and recovering from the Great Recession.
Earlier this year, the Pew Charitable Trusts released a report on states’ long-term financial obligations. Pew is no friend to public pensions: they actively work throughout the country to promote ineffective and unreliable cash balance plans. However, their data on state pension obligations contains some important information.
One tab of their dataset contains annual statistics on the funded ratio of each state’s public pensions. Their data shows that in 2007, most public pensions were reasonably well-funded. Several were over 100 percent funded, a good number were over 90 percent funded, and many were above 80 percent funded. The ones that were not well-funded are the states that have had long-running pension problems (and continue to have them today): Illinois, Kentucky, etc. Then, in the two year period from 2008 to 2009, we see the funded ratios drop for almost all plans.
- Florida drops from 101.4% funded to 84.1% funded
- New York drops from 101.5% funded to to 94.3% funded
- Oregon drops from 112.2% funded all the way down to 80.2% funded
Clearly, the Great Recession had a profound impact on the funded status of pension plans throughout the country. And for many pensions, it has been challenging in the years following the financial crisis to recover their losses. The economic recovery has been slow. This means many pension plans still have a lower funded ratio than they did pre-recession. There is good news, however. For each of the past two years, the average funded ratio of public pension plans in the U.S. has improved. Many individual pension plans are recovering more quickly than the national average.
What lessons should we take away from this? First, the Great Recession had a profound impact on pensions and any discussion of the challenges facing public pensions must acknowledge this fact. Public pensions would be in a much better place than they are today if the Great Recession had never happened.
Second, the sky is not falling. As funded ratios fell in the aftermath of the financial crisis, many politicians panicked and called for dramatic changes to public pensions. This is the wrong response. The right response would be to steady the ship and stay the course. The single most important thing states can do to have well-funded public pensions is to fully pay their contribution to the pensions each year. This is especially true during a recession when investment revenue is likely to decrease significantly.
The final lesson is patience. Given enough time, public pensions will regain their footing and make up their investment losses. It may not happen right away, especially given the slow growth environment since the Great Recession, but eventually public pensions will regain sustainable funding levels.
As the abject failure of 401(k)s makes clear, defined benefit pensions remain the most secure and reliable retirement plan for working families. Even after a painful crisis like the Great Recession, states should stick to their commitment and continue to fund their pensions.