For a decade now since the Great Recession, special interests have waged a false-information campaign against public pensions. While not all of the motives are clear, one thing is certain: if the over $3.8 trillion in assets managed by state and local pension funds were converted into individual 401(k)-style accounts, someone on Wall Street would stand to reap enormous financial benefit. In California alone, CalPERS, the 7th largest pension fund in the world, manages $295 billion in assets. The playbook to convert public pensions to 401(k)s has changed, but the lack of honesty in the arguments has not.
As with virtually all other investors, public pension funds suffered losses on their investments during the Great Recession. By one count, the financial markets lost 33% of their value from 2008 to 2009. Undeniably, this affected the funded status of public pension plans. According to data collected by the Center for Retirement Research, the average funded ratio of public pension plans declined from 86% in 2007 to 77% in 2009. Some states, like Idaho, suffered major drops in funded status while others, like North Carolina, saw smaller drops. Regardless, every pension plan was impacted.
Public pension opponents jumped on this opportunity to say that pensions were doomed and unsustainable. However, with a few notable exceptions, the data tells a different story: public pension funds have been making consistent progress toward improving their funded levels. According to the Center for Retirement Research, the average funded status of pension plans nationwide was 74% in 2015 and is expected to reach 78% by 2020. While these numbers are still lower than their pre-recession levels, they demonstrate that pension funds are recovering from their losses. The states still struggling to recover are most often states where years (or even decades in the case of Illinois and New Jersey) of underfunding due to political malfeasance have resulted in poorly funded plans. States with better funding discipline like Wisconsin and South Dakota have fully funded pension systems and New York and North Carolina have plans that are funded above 90 percent.
Realizing that plan funding is recovering, it was time to come up with a new way to attack pensions. Recently, the subject of investment returns for public pension funds has received a significant amount of attention. Capitalizing on a couple years of low returns, opponents are advocating for a so-called “risk-free” rate of return for pension systems’ discount rate. As with the criticism on the funded status directly after the recession, these calls are dishonest, masking a campaign to convert assets for Wall Street’s gain.
Like many investments, public pensions are a long game. Money invested today will be used to pay pension benefits twenty or thirty years from now. What’s important for public pension funds is not necessarily year-to-year returns, but twenty or twenty-five year returns. Public employees, state and local governments, and taxpayers all benefit from the steady, consistent performance of public pension funds.
The Oklahoma Teachers Retirement System (OTRS) recently reported its one-year investment return at more than 21 percent. This is an astounding number, but it is also only one year’s return. So how do the fund’s long-term returns match up with actuarial assumptions? OTRS reported that its 5 year return was 9.63%, surpassing the assumed rate of 7.83%. The ten year return of 6.87% fell just short of the assumed 7.92%, but this period includes the Great Recession. Since the inception of the fund, the return on investment has been 9.35%, exceeding the actuarial assumption of 7.97%.
The recent returns from OTRS are just one example, but they make an essential point about public pensions. Given a long enough time frame, pension funds do meet or exceed their assumed rate of return. In fact, according to the National Association of State Retirement Administrators, public pension plans exceed their median assumed rate of return over 25 years.
Despite the “sky-is-falling” rhetoric one sometimes hears about public pensions, they continue to be the most efficient means of providing a secure retirement for working families. Public pension funds are recovering from their losses during the recession and some systems have managed impressive investment returns in recent years. More importantly, pension funds continue to meet or exceed their assumed rate of return over the long term. Public employees and taxpayers should expect pension plans to continue their record of success in years to come.