As routine as the changing of the seasons, every year, Truth in Accounting (TIA) produces a new report which declares that taxpayers across the country will somehow have to foot a huge tax bill immediately to pay for their state’s unfunded pension liabilities. However, a recent working paper from the Brookings Institution shows this is not a truthful depiction of how public pension funding works.
TIA often argues that taxpayers are responsible for paying their city and/or state’s unfunded liabilities in a few ways. First, if a pension isn’t at 100% funded status in the course of a given year, they state that the pension is somehow in grave jeopardy and that its unfunded liabilities need to be paid immediately to ensure the pension is “debt-free.” They then calculate a supposed “taxpayer burden,” or an amount each taxpayer will have to pay to meet their state or local pension’s unfunded liabilities.
These tactics, which are often amplified by news outlets critical of public pensions such as the Center Square, are designed to elicit fear that taxpayers will have to fork over a large bill at some point in the future for their area’s pensions.
In their paper for Brookings, authors Jamie Lenney, Byron Lutz, Finn Schüle, and Louise Sheiner note that the assumption that a fund needs to be at a 100% funded status to be fiscally healthy is just that: an assumption that does not stand up to scrutiny.
“People are used to thinking that the government’s budget is like their household budget and that state and local governments are not supposed to have debt,” Sheiner said in an interview with Market Watch. Sheiner is correct that unfunded liabilities are structured a little differently than one’s personal monthly budget.
TIA makes unfunded liabilities seem more ominous than they are because they selectively highlight a pension’s unfunded liabilities in just one year while failing to disclose that pensions specifically invest in the long-term. An unfunded liability simply means that a fund does not have enough assets to pay out retirement benefits to all current and retired public employees. A pension system has never needed all of that money at once. For a current employee who will work for another 20-30 years, the system will have the same amount of time to earn investment returns to distribute pension benefits when that worker inevitably retires. The Brookings report also states “that being able to pay benefits in perpetuity doesn’t require full funding,” so long as policymakers continue making their required contributions.
The assertion that taxpayers also will have to chip in thousands of dollars for public pensions is also erroneous because you’re not going to get a bill in the mail one day that says you’re on the hook for a portion of your state’s unfunded liabilities. If a plan’s unfunded liabilities do start to increase, it’s often because legislators have skipped or deferred paying into pension systems over time, so it’s up to those lawmakers to practice fiscal discipline to address them.
Furthermore, the National Institute on Retirement Security has found that public pensions actually benefit taxpayers, as they generated $202.6 billion in federal, state, and local tax revenue in 2016.
“Our results suggest there is no imminent ‘crisis’ for most public pension plans,” the authors of the Brookings study write in the ending to their paper. This is a far more accurate depiction of the current state of public pensions, in contrast to the falsehoods that TIA continues to peddle season after season.
