Holidays are one of the rare moments throughout the year when you can gather with loved ones. In between partaking in activities such as avoiding cold weather and doing last-minute shopping, you can also view this time as an opportunity to address any misconceptions about public pensions!
Below we’ve highlighted some common myths and facts around public pensions and retirement security from a previous blog:
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 West Virginia, the state closed its State Teachers’ Retirement System to all new teachers in 1991 and instead offered them a defined contribution plan. As a result, the funding ratio decreased to just 25 percent in 2005, and that same year the state reopened the defined benefit plan, which improved funding levels to 70 percent in 2018.
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.