Since the COVID-19 pandemic began, pension opponents have continued spreading misinformation about public pensions. Today we’re going to challenge three misconceptions they frequently cite to try to damage public workers’ retirement security.
1. Unfunded liabilities for pensions are crowding out spending on other government services.
One of the most frequent claims pension opponents make is that unfunded liabilities for pension plans are increasing, leaving less money for states to spend on other government services. Upon closer examination, this claim does not hold up to reputable evidence.
According to a new report from the Center for State and Local Government Excellence and the Boston College Center for Retirement Research, the vast majority of pension plans are well-funded and will be able to continue paying out benefits during the coronavirus-induced economic crisis and beyond. The report shows that the average funded ratio for local plans in the fiscal year 2020 was 70.8 percent, and it was 72.4 percent for state plans. These funded ratios are roughly the same as they were in the last fiscal year, despite the economic slowdown in March.
2. Since most private-sector workers primarily use a 401(k), policymakers should switch public employees to one, too.
In the first two to three decades after World War II, most private-sector workers in the United States had access to a defined benefit pension plan. However, after Congress passed the Revenue Act in 1978, most corporations switched their employees to defined-contribution accounts, such as 401(k)s.
As a result of this switch, more than 58 million Americans participated in a 401(k) in 2018. These accounts, however, have been less than ideal for these workers’ retirement security. As we’ve covered before, 401k(s) were marketed as a way for workers to save on their own for retirement. However, a rising cost of living prevents most Americans from being able to save enough for retirement; the median amount in Fidelity Investments’ 401(k)s is $24,500.
Research shows that defined-benefit pensions are a valuable resource for the public workforce. According to the National Institute on Retirement Security (NIRS), 94 percent of state and local public employees said offering a defined benefit pension is an effective tool for recruiting and retaining public employees. 73 percent of those in the same survey also said they would be more likely to leave their job if their defined benefit pension was cut. NIRS has also found that 401(k)s are more expensive to implement compared to defined-benefit pension plans and that they do not provide the same amount of security in retirement, making them a better bang for the buck for both public employers and employees.
3. State and local pensions need a bailout from taxpayers.
A potential “bailout” for state and local pensions is another falsehood that pension critics have been peddling ever since Senate Majority Leader Mitch McConnell said in an interview on April 22 that state and local governments should just declare bankruptcy during the coronavirus-induced economic recession, instead of asking the federal government for assistance.
This fabrication is incorrect for a number of reasons, the first being, as referenced above, that the vast majority of public pensions were able to weather the financial storm during the beginning of this pandemic. Secondly, as we highlighted last week, state and local governments spend little taxpayer money on funding pensions. According to the National Association of State Retirement Administrators (NASRA), state and local governments spent less than five percent of their overall spending on pension funding in the fiscal year 2017. Public pensions also receive the majority of their funding from investment earnings, not from employer contributions. Finally, pension expenditures help taxpayers, as NIRS has found that they supported more than $200 billion in federal, state, and local tax revenue in the fiscal year 2016.
Furthermore, a lack of federal assistance is not going to cause systems to go belly up, that is just misdirection. Without receiving additional resources, states find it much more difficult for our essential public workers to provide services. For example, if we want children to return to the classroom, schools need resources to provide a safe environment for students, caretakers and employees.
All three of these claims are misconceptions for a reason. They do not line up with the evidence which shows that public pensions are well-funded, benefit both employers and taxpayers, and provide a secure retirement for public employees.
