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:
In One Year, Pandemic Forced Millions of Workers to Retire Early by Jon Marcus. One year ago yesterday, the World Health Organization (WHO) declared COVID-19 a pandemic. Since then, older workers (those who are at least 55 years old or older) have witnessed a significant threat to their retirement security from the resulting economic fallout. According to Marcus’ article for AARP, nearly 2 million older workers have lost their jobs since the beginning of the pandemic, forcing many of them to retire earlier than expected. Marcus also cites the National Institute on Retirement Security (NIRS), which found that “more than a quarter of all workers say COVID has prompted them to move up their retirement date.” Retiring early can have negative financial consequences for workers for several reasons, such as workers saving less for retirement than if they had retired later and earning lower Social Security benefits. Policymakers can protect older public employees by maintaining their defined-benefit pensions to ensure they can retire with economic security.
‘Gravy train’ for CT employees is a false narrative by Sean Goldrick. In an op-ed for the Greenwich Time, Goldrick pushes against a recent piece by Red Jahncke, which claimed that Connecticut state employees earn “overly generous” pension benefits. Goldrick accurately notes that a 2015 study of the State Employees’ Pension System (SERS) showed that the system’s liabilities are not the result of “overly generous” pension benefits. Instead, the liabilities exist because legislators consistently underfunded the system, driving up the plan’s legacy costs. Goldrick also shared that, since the State Employees Bargaining Agent Coalition (SEBAC) agreement was finalized in 2011, public employees experienced cuts to their pensions, making “their benefits fall well below the national average.”
Florida’s public pension plan works just fine. But lawmakers need to fully fund it by Charles E.F. Millard. In Florida, the state Senate is currently considering Senate Bill 84, which would close the Florida Retirement System (FRS) to all newly hired public employees. Millard, the former director of the U.S. Pension Benefit Guaranty Corporation, highlights three arguments policymakers make supporting this change and why they do not hold up to the facts. The first argument, Millard writes, is, “The 401(k) system is good enough for private-sector employees; it should be good enough for public sector employees.” Millard illustrates that this is not true, as the median 401(k) balance, according to Vanguard, is $65,000, which is not enough to retire with security. The second argument claims, “Florida cannot afford these huge liabilities,” which is a common way pension opponents confuse policymakers and the public about the affordability of pensions. In reality, FRS is currently 82% funded, 10% higher than the median for public plans. Finally, the last argument states, “The pension system’s underfunding is not improving even though assets are growing; the system is broken.” Shockingly, that argument also does not stand up to scrutiny. The underfunding is not improving because Florida’s lawmakers are not practicing fiscal discipline and making their required contributions to the plan, and they have “underfunded Florida’s pension plan by about $1 billion a year over the past five years.” If state lawmakers want to take action on the system, Millard closes, they “should pass a law that requires the Legislature itself to make the full, correctly calculated contributions that are part of the formula for responsible pension funding.”
COVID-19 fallout prompts rethink of stress test advice – Pew by James Comtois. In this article for Pensions & Investments, Comtois covers Pew Charitable Trusts’ model of stress testing. Pew, a longtime critic of public pensions, updated its stress test to take into consideration the impact of COVID-19 on public finance. Pew’s advice on stress testing generates results that paint public pension plans in more dire situations. Pension plans routinely conduct stress tests to determine what the actuarially required contribution (ARC) should be for a plan to preserve optimal funding. To calculate the ARC, plan sponsors look at investment performance over the long-term since those returns have much less variability than short-term investments. It is important for lawmakers to work with the experts at the pension fund who can provide accurate, state-specific information.
Be sure to check back next week for the latest news in the fight for a secure retirement!