The habitual overpromising and underfunding of government-employee pensions is a fiscal powder keg in an economy full of sparks — and a new report estimates that teachers’ pensions alone are underfunded by nearly a half-trillion dollars.
Strange, then, that the state of New York has decided to take about $1 billion out of its teachers’ pension system to “invest” in infrastructure projects related to recovery from Hurricane Sandy, an initiative announced by Bill Clinton. (Remember him?)
New York is one of the few states that can afford to roll the dice a little bit with its teachers’ pensions, because New York is one of the few states with pension systems that are not critically underfunded. (The few others include Idaho, Alaska, Wisconsin, South Dakota, North Carolina, Tennessee, and Washington.) City comptroller John Liu said yesterday: “This innovative plan could help us rebuild the city, create jobs, and yield solid returns on our pension funds,” but it is not yet entirely clear how that will happen, and the details of the particular investments remain murky. The pension fund may simply buy bonds related to infrastructure projects, or it may take a direct ownership interest in some of the projects.
I find this troubling inasmuch as mixing a pension manager’s fiduciary responsibility with political incentives invites conflicts. For example, the pension fund could face political pressure to make investments in the districts of influential elected officials, or to lend money on overly liberal terms. The public enterprises that perform well usually are those that do one thing and concentrate on doing it well, and it probably would be best for New York’s teachers if their pension manager focused exclusively on fiduciary concerns rather than try to act as a creator of jobs or an organizer of hurricane-recovery projects. It will be interesting to see what kind of returns these investments yield.
Beyond New York and the handful of funded-up states, the picture looks pretty grim. Key findings from “No One Benefits,” the report referenced above:
Pension systems are severely underfunded. According to the most recent data available, NCTQ estimates that teacher pension systems in the United States have almost $390 billion in unfunded liabilities. Funding shortfalls have grown in all but 7 states between 2009 and 2012.
Pension underfunding is even worse than meets the eye due to unrealistic assumptions and projections about returns on investments. Even with states almost certainly overestimating how well funded their pension systems are, NCTQ finds that pension systems in just 10 states are, by industry standards, adequately funded.
Retirement eligibility rules add to costs. In 38 states, retirement eligibility is based on years of service, rather than age, which is costly to states and taxpayers as it allows teachers to retire relatively young with full lifetime benefits. In the just ten states—Alaska, California, Illinois, Kansas, Maine, Minnesota, New Hampshire, New Jersey, Rhode Island and Washington—that no longer allow teachers to begin collecting a defined benefit pension well before traditional retirement age, states save about $450,000 per teacher, on average.
Most pension systems are inflexible and unfair to teachers. Many assume that defined benefit pension plans are a clear win for teachers. But while most defenders of the status quo fight tooth and nail to preserve traditional pension plans, the reality is that these costly and inflexible models are out of sync with the realities of the modern workforce. Current National Council on Teacher Quality pension systems are built on a model that assumes low mobility and career stability and helps to put public education at a competitive disadvantage with other professions.
Note that the savings per teacher derived from the reform of eligibility rules runs $450,000, or more than two and a half times the average net worth of a retirement-age U.S. household. The real value of the average teacher’s retirement benefits in low-cost Wyoming is pushing the $1 million mark. The value of the average teacher’s retirement in Illinois is estimated at $2.4 million — and they were on strike over compensation not too long ago. Illinois has been issuing debt to meet its pension obligations, an unsustainable strategy.
The economics of the pension situation is of course worrisome (terrifying), but the political lesson is depressing, too: Government simply cannot be trusted to keep honest accounts.
NOTE: This has been corrected since first posting.