Why Pre-fund? Why Fully Fund?

The Terry Group, actuaries and experts on pension plan funding, are developing a series of commentaries to advance the discussion on retirement solvency. In their most recent column, “Why Pre-fund? Why Fully Fund,?” they address the challenges to pre-funding public pension plans and whether full funding will be a result. They ask the question, “Should immediate full funding of current liabilities be the ‘norm?'”

Putting the situation in a more relatable context for the average citizen, they set up a construct where “it may be useful to think of the pool of current taxpayers in a public entity as analogous to the current stockholders of a private sector entity. And future taxpayers-those who will ultimately have to pay the deferred funding cost-as analogous to the future investors of a private sector entity. Those future taxpayers (like future investors) may ‘discount the value of the municipality,’ e.g., through reduced property values, to reflect the deferred funding obligation.”

Working upon the assumptions that any and all pension promises will have to be made at some point in the future (except in the case of a default), that the costs of most pension plans continue to increase and many are oversubscribed, and that aggressive pre-funding in private sector plans is required by law, perhaps state and/or federal law should find a way to require fully funded systems so that all public pension plans can actually pay out benefits promised years in the past without crippling future generations of taxpayers. As it stands now, governmental accounting standards are just that, standards and guidelines, and it is largely up to pension boards to make the final funding decisions.

Reason Foundation’s director of economic research, Anthony Randazzo, has also explored the issue of full funding at some length here. He concluded that “there are various fiscal, political, and institutional factors at work, and no one-size-fits-all answer.”

To read The Terry Group’s full analysis, go here.