Welcome to this week’s edition of This Week in Pensions! This is the news you need to know in the fight for a secure retirement.
Before you dive into our top stories from this week, check out some stories of public employees helping their communities during the coronavirus pandemic.
Here are the top stories from this week:
How Pandemic-Driven Revenue Shortfalls Could Affect State Pension Contributions by David Draine & Stephanie Connolly. In this article for Pew Charitable Trusts (a notable opponent of public pensions), Draine & Connolly argue that the pandemic-induced economic downturn should make policymakers consider using stress testing to evaluate their states’ public pension plans. Pew advocates for stress testing, but most public pension plans already conduct stress testing to determine what a plan’s actuarially required contribution (ARC) should be. These annual reports examine the expected investment earnings throughout an employee’s career (20-30 years, for example), which gives sponsors an accurate and unbiased rate of return since these results have less variability over time. However, when outside groups like Pew push for stress testing, they tend to only emphasize downsides in the market in their analysis, which creates biased results for plan sponsors and can make the ARC look larger than it should be to account for these supposed downsides. Policymakers would be wise to steer clear of Pew’s agenda and listen to the experts at the plans themselves to gain an unbiased view of a pension plan.
Retirement fund blues by John McClaughry. McClaughry claims that the Vermont State Employees’ Retirement System (VSERS) and the Vermont State Teachers’ Retirement System (VSTRS) should be converted to defined-contribution plans to pay off their unfunded liabilities. This argument is incorrect for several reasons. First, the experiences of states that have switched from a defined-benefit system to a defined-contribution one in the past show that closing a plan does not help the unfunded liability. The National Institute on Retirement Security (NIRS) has previously examined the consequences of Alaska, Kentucky, Michigan, and West Virginia closing their defined-benefit plans and found that costs for all four of these states increased after they closed their plans. Secondly, changing the plan design for public employees increases retirement insecurity, as defined-contribution plans do not pool members’ risk, leaving them more vulnerable to downturns in the market. In West Virginia, for example, closing the Teachers’ Retirement System and switching newly hired public employees to a defined-contribution plan was so disastrous that the state re-opened its defined-benefit plan in 2005. Finally, closing a defined-benefit plan can also lead to challenges in a state’s public workforce. After Alaska closed its defined-benefit plans in 2005, the state experienced significant difficulties recruiting and retaining public employees, with the Alaska Department of Public Safety specifically citing the lack of a defined-benefit pension as one reason why they struggle to recruit and retain employees. Instead of switching all public employees to a defined-contribution plan, policymakers should practice fiscal discipline and make their required contributions to the plans they manage, just like public employees do with each and every paycheck.
US Pension Spending Supports $1.3 Trillion in Economic Output by Michael Katz. Katz writes about a new report from NIRS last week for Chief Investment Officer, which examined how spending from defined-benefit pensions boosts state and local economies across the country. We previously covered many of this report’s major findings on our blog, but Katz also emphasized that expenditures from pension spending “generated $1.3 trillion in total economic output in 2018, supported nearly 7 million US jobs, and added nearly $192 billion to federal, state, and local government coffers.” This report makes clear that defined-benefit plans make a critical difference not just in the lives of public employees but in the communities they serve, as well.
Be sure to check back next week for the latest news in the fight for a secure retirement!