The Case for Reforming State and Local Pensions

Pension plan papers are spread out on a table with reading glasses

A new draft white paper from the Office of the Assistant Secretary for Policy at the U.S. Department of Labor addresses the widespread underfunding of the retirement systems in the nation’s state and local governments.

Depending on methods of measurement, the sum of all unfunded pension liabilities in states and localities ranges from about $1.4 trillion to just over $4 trillion. These liabilities vary across states; this report estimates Illinois’s self-reported unfunded pension liability at just under $170 billion (which translates to roughly $13,000 per person), while South Dakota’s self-reported unfunded pension liability is negligible or zero.

The report supplies both total unfunded pension liabilities and per capita unfunded pension liabilities for each jurisdiction; it may be useful to think of the debt-per-person figure as revealing an implicit tax burden borne by each member of the state’s population, because if states and localities cannot correct chronic underfunding by other means, they are likely to look to taxpayers to make up the difference.

This report explains that there are a number of causes for this underfunding, including a variety of pressures and processes within these retirement systems that can operate to the disadvantage of employees, beneficiaries, and the public generally. These causes include temporal pressures (pressures to delay making difficult decisions), representational pressures (pressures to appoint pension trustees with qualifications other than administrative expertise), ideological pressures (pressures to use politicized pension investment strategies), and political pressures (pressures to give organized interests a disproportionately large role in decision-making).

The report outlines a number of recommendations to address the problems it identifies. Specifically, state and local government pension plans should address shortfalls in the short term, stop making unrealistic promises, stop offloading debts to the future, create transparency in pension governance, establish automatic funding adjustments, encourage professionalism among pension trustees, and improve retirement security through actuarially defensible management decisions.

Finally, the Employee Retirement Income Security Act reflects a powerful federal model for pension plan management and oversight — areas where many state and local government plans fall grievously short. Adopting rules similar to those governing private-sector requirements would likely have positive consequences if implemented for state and local government pension plans and their beneficiaries.

Read the full report here.

Jonathan Wolfson is the Deputy Assistant Secretary for Policy and Daniel Greenberg is a senior policy advisor at the U.S. Department of Labor.

Sourced from Us Dept of Labor

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