Right now, millions of Americans are feeling the financial impact of the COVID-19 pandemic. In the past four weeks, more than 22 million unemployment claims have been filed across the country. The stock market is trying to recover from a significant downturn. And businesses are trying to keep their doors open in this new economic environment.
As we evaluate how our economy changed overnight, it is important to elevate policies with known results. We know pensions provide immediate and long-term fiscal stability to their recipients while providing a much-needed economic boost to communities. According to the National Institute on Retirement Security, the spending from monthly pension payments supported 7.5 million jobs and $1.2 trillion in total economic output nationwide in 2016. However, pension opponents are taking advantage of the economic downturn to peddle false and misleading narratives about public pension funds. Below, we highlight three recent articles featuring these arguments and why they don’t have merit.
The next covid-19 victim? Public pension funds. By Michael Glass and Sean Vanatta. In an op-ed for the Washington Post, these authors falsely claim that public pension plans will be rendered the way of the dodo bird in the wake of the coronavirus market downturn because they invest in supposedly “risky assets.” The authors conveniently fail to mention that public pension plans invest in the long-term, giving them a longer time frame to recover any short-term losses in the market. Furthermore, the vast majority of public pension plans are well-funded, leaving them in a solid financial position to counter any adjustments in the market. Finally, no investment is entirely immune to economic changes. The authors cite the relative safety of public pension funds investing heavily in municipal bonds in the first half of the 20th century as justification that they made safer investments than today. One needn’t look further to more recent examples like the city of Detroit in 2013 or the territory of Puerto Rico in 2016 defaulting on their municipal bonds that negative changes can happen to even the “safest” of investments. That’s why public pensions are in a better position to maximize returns and minimize risk for their members because they spread out a mix of high-risk and low-risk investments over a longer period of time.
How Well-Funded Are Pension Plans in Your State? By Janelle Cammenga. Cammenga compares the funded status of pension plans in each state in an article for conservative think tank the Tax Foundation. As we’ve written before, this is an extremely misleading way to cover this topic:
“Although every plan in the country is run differently, the current average discount rate is 7.6 percent. According to the National Institute on Retirement Security, nationwide, the median rate of return for pension funds is 8.3 percent, which provides some buffer from the calculated discount rate. In a few states around the country, lawmakers repeatedly skipped, deferred, or only partially paid into pension funds every budget cycle. While public employees paid their share each and every paycheck, these states have a high unfunded liability due to this type of mismanagement by lawmakers.”
We also wrote that “pension opponents often push this narrative because they have ulterior motives, such as closing a public pension plan and moving all newly hired public employees into a riskier 401(k)-style retirement plan,” and we believe that this is still the case when articles like this one are published about pension plans.
Nebraska should shift to this approach for teacher pensions by Chad Aldeman. In this op-ed for the Omaha World-Herald, pension critic Aldeman writes that because of the coronavirus market downturn, Nebraska should switch its educators from a pension plan to a cash balance plan. As we have written before, cash balance plans fail as an adequate replacement option for a pension. With a pension, the defined benefit is a guaranteed monthly benefit based on the length of their career in public service. The defined benefit in a cash balance plan tends to be a set rate of return on investment, essentially moving a public employee into a 401(k)-style retirement product, leading to a lack of adequate retirement savings. Furthermore, switching to cash balance plans hurt taxpayers because pensions encourage people to remain in their professions for longer periods of time, saving the taxpayer money on the cost of high employee turnover.
Lawmakers need to protect pensions during this economic downturn and in the future to ensure public employees can retire with security and dignity.