Since the current market downturn began, pension critics have been pushing a false narrative that unfunded liabilities are skyrocketing and that pensions are at risk of running out of money.
Last Tuesday, the Center for State & Local Government Excellence (SLGE) released a new report on how the economic crisis will affect public pensions, which showed that these narratives are not rooted in fact.
SLGE found that “even if markets do not fully recover until 2025, most plans will emerge with enough assets to pay benefits indefinitely.” As we noted last week, “this is further proof that most pension plans are well-funded enough to withstand the current economic crisis.”
SLGE examined roughly 200 state and local government plans and modeled two different economic scenarios that could impact these plans, including one in which the economy remains in a downturn until June 2021 and doesn’t return to its pre-crisis peak until 2023. The second, “more pessimistic” scenario is that the economy still remains in a downturn until June 2021, but “the recovery takes longer with markets steadily climbing to their previous peak by 2025.”
The Center found that, despite a slight decrease in most of these plans’ funded status, “no plans are projected to exhaust their trust fund within the next five years.” Furthermore, public pensions will have on hand assets equal to roughly eight to nine years of benefits in 2025, and that “as long as annual investment returns exceed their cash flow,” plans can “sustain asset levels.”
This is good news for public pensions, which invest for the long term and are well-built to withstand economic downturns due to their mixture of high-risk and low-risk investments. The National Association of State Retirement Administrators (NASRA) has found that the average real rate of return for public pensions has increased from the fiscal year 2002 to the fiscal year 2018, meaning most plans withstood the effects of the dot-com bubble and the Great Recession.
It’s more important than ever that lawmakers practice fiscal discipline and continue fully funding their pension systems. As we’ve noted before, “the main cause of pension underfunding is not a plan’s investment performance, it’s whether or not plan sponsors make their required contributions.” Continuing to make these payments, especially during market crises, is critical to maintaining funding levels.
As this new research from SLGE makes evident, it appears that all the plans surveyed will be able to withstand this current downturn and will continue to be an asset for retirees and their families across the country.