We have covered the Reason Foundation on our blog before and developed a video about them. This year, they have focused on overemphasizing public pensions’ unfunded liabilities, creating the illusion that pensions are not financially stable and a burden on state and local governments. In states such as Florida and North Dakota, their testimony before lawmakers ignores context and accurate information about how pension plans operate to further their narrative that their state’s pensions are somehow in trouble.
For example, in articles like this one about the Florida Retirement System (FRS), the Reason Foundation unfairly cites FRS’ unfunded liabilities to argue that it is in a supposedly decrepit fiscal shape (this is false, as the FRS is one of the most well-funded systems in the country).
First, let’s correctly identify what unfunded liabilities are. If a system has an unfunded liability, that means “the pension plan does not have the full amount of money it will need to pay out ALL of the retirement benefits it will owe in the future to ALL of its current and former employees.” What the Reason Foundation conveniently omits in their articles about FRS and pension plans in other states is that pension systems will never need all of that money at once because pension systems are specifically designed to be invested over the long term.
An unfunded liability is similar to a 30-year mortgage because banks and credit agencies intuitively know that each of them are supposed to be paid off over a longer period of time. For a public employee who will retire in a few decades, for example, the plan they belong to will also have the same amount of time to earn enough investment returns to pay out retirement benefits.
The Reason Foundation’s analysis also only looks at one side of the coin regarding pension funding -debt – without taking into account Gross Domestic Product (GDP). This would be like examining a mortgage without scrutinizing one’s financial assets. The National Conference on Public Employee Retirement Systems (NCPERS) has found that “economic growth, as measured by GDP, greatly exceeds the growth in pension liabilities when they are compared correctly,” showing plans can weather the ups and downs of the economy while providing a secure retirement to their members.
Finally, by trumpeting an unfunded liability in the headline of an article, the Reason Foundation also wants you to believe that pensions eat up a large chunk of state and local governments’ budgets when that claim does not hold up to reputable evidence. The National Association of State Retirement Administrators (NASRA) notes that the national average of state and local government spending on pensions is 5.2%, and Florida’s is even lower at 2.86%.
Organizations like the Reason Foundation cherry-pick data, like a plan’s unfunded liability, to agitate lawmakers that their state’s pension system is failing. They then use the manufactured crisis to imply that newly hired public employees should be switched into a defined-contribution plan instead of a defined-benefit one, which would result in a weaker retirement for public employees and increased costs for states.
What the Reason Foundation doesn’t want you to know is that most public pension plans are doing well. Despite the economic downturn, the funded status of most plans increased last year.
Don’t fall for the scary headlines and fear tactics. Public pensions are proven to be the most effective way to guarantee retirement security for public employees who have dedicated their lives in service to our communities.