The Financial Crisis and State/Local Defined Benefit Plans
November 18, 2008
Center for Retirement Research, Boston College
It seems likely that some form of bailout for the Big Three automakers is going to occur. It's just as likely that American automakers won't change their ways (and neither will the auto-workers' unions). They will burn through any government bailout money and will still face bankruptcy by summer. American car companies have been consistently out-thought by their competitors for decades. The companies also are saddled with completely unrealistic, hugely expensive pension and benefit plans. The crisis has brought the day of reckoning for those plans much closer, maybe next year. The federal government probably won't force the companies or their unions to change these agreements.
Taxpayer dollars, or worse, money the government has borrowed and taxpayers must repay with interest, will simply be poured down a rat hole.
The auto industry fiasco, which most American policymakers have been satisfied to ignore for years, is also helping bring attention to another potential disaster. With tens of millions of Americans having lost good chunks of their life savings, with hundreds of thousands out of work, it increasingly looks like they also might be on the hook to make good the future pension plans for hundreds of thousands of public employees. The numbers in a new report by researchers at the Center for Retirement Research at Boston College make for scary reading. The current crisis cost retirement plans covering American workers $4 trillion between October 2007 and October 2008 and $1 trillion of that has been lost by state and local defined-benefit plans.
The study points out that nearly 80 percent of state and local workers are covered by a pension compared with only 45 percent in the private sector. In 2007, the average funding ratio (assets divided by liabilities) in public-sector plans was 87 percent but a year later had fallen to 65 percent. If stock prices rebound smartly, by 2013, the funding ratio still will be underfunded at 75 percent and if they don't the ratio could slip further to 59 percent under the analysis. A Thomas B. Fordham Institute study of potential problems with Ohio's State Teacher Retirement System plan in 2007 indicated a potential shortfall of nearly $20 billion that taxpayers would be on the hook to make up (see here). And this analysis was performed before the current crisis. The authors point out that since many courts have ruled it is illegal to modify public pension plans, the only way to raise additional funds will be to boost contribution rates for new employees and for the taxpayers to chip in with substantial dollars-those same taxpayers who are now losing their jobs, their savings, and their pensions. Read the study here.