SAN DIEGO — Expect the disconnect between the short-term goals of politicians and the long-term planning necessary to cover retirement plan costs to continue to be a problem in solving pension liability issues facing states and localities.
That theme arose during a question-and-answer period following a panel discussion on pension and benefit reforms Wednesday at the annual conference of the National Federation of Municipal Analysts.
“I have yet to find a financial officer of any locality who will say when times are good we ought to set money aside and prefund our retirement plans,” said Robert C. North, Jr., chief actuary, New York City Office of the Actuary.
Government is about choosing, North said. “I have yet to find anyone who would not rather spend the money on other things,” he said.
Actuaries include that factor as part of risk analysis, he said.
“I don’t know how you solve the problem when people looking to the next election as their long term are in charge of 60-year issues,” North said.
That reality is creating a growing problem for governments.
“The demographics are that we are an aging society,” North said. “The retirement rolls are growing. If you haven’t prefunded the retirement plan, there is a very good chance you are looking at some significant problems.”
Pensions are becoming a bigger and bigger issue, North said, and the actuary’s role is to work with the numbers and figure out what is a reasonable amount of time to pay pension liability.
A pension fund’s investment policy is basically a set of guidelines outlining the level of risk to take, North said.
“It’s about not just the level of benefit income, but who is bearing the risk,” he said.
The current thrust in pension reform to take away benefits will also come back to haunt governments, speakers said.
“If you put in a new tier that doesn’t provide a level of benefits appropriate to retain and attract employees then 15 years from now, you will have to fix it,” North said. “You are just doubling down and putting the risk on taxpayers.”
Down the road, the so-called reforms could mean that governments will have a difficult time attracting employees.
The reforms also go against the standard wisdom that government, while paying less than private industry, has typically offered job security and security in retirement.
Another speaker, Steve Kreisberg, director of collective bargaining for AFSCME, a union that represents city employees, raised an issue that has received much less attention then the impact of the pension liabilities on government budgets and the ability to fund other services – what happens when the retirees now receiving limited benefits retire.
Kreisberg argued that the federal government, state and local governments are going to have a much worse funding problem on their hands in taking care of people with lower benefits if they end up living in poverty.
The average salary of his members nationally is $32,000, he said. Most make $20,000 a year in retirement -- and 25% don’t quality for social security.
Another question raised during a question and answer period is: What happens if pension funds don’t get the returns in the next 20 years that have been experienced over the past 20 years?
North argued that it’s unlikely such returns can be reproduced, because the world has changed, but Kreisberg disagreed.
“In this case, Bob is wrong,” Kreisberg said. “This is where actuaries will differ.”
He added that actuaries tend to lean to the conservative, but the process needs that voice saying, “what if things go wrong.”
If North is right, however, and the U.S. is entering a new era where it does not experience growth because the population is aging, which doesn’t tend to lead to growing economies, that will have real implications for public finance, Kreisberg said.
“If we have people whose 401(k)s are not performing well now, and haven’t performed well over the past 30 years, what kind of demand are they going to be making on public systems?” Kreisberg said.
This is probably not something that can be factored into public analysis, but it has real implications, Kreisberg said.
“We are going to have real demands on government if we can’t sustain the pension system with returns similar to what we had in the 20th century,” he said. “Pensions will probably be the least of our problems if that happens.”