Pension Reform News: Modeling pension changes and costs, Alaska’s rollback of reform, and more

This month’s newsletter from the Pension Integrity Project at Reason Foundation highlights articles, research, opinion, and other information related to public pension challenges and reform efforts across the nation. You can find previous editions here.

In This Issue:

Articles, Research & Spotlights 

• Pension Integrity Project pension modeling to help stakeholders 
• Alaska’s potential rollback of reform could be costly
• Montana needs to improve the way it pays for pension benefits
• Retirement benefits are low priority for young public workers
• SECURE Act 2.0 improves defined contribution plans
• Chicago turns to a casino to improve funding of pensions

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Reason’s Modeling Approach to Analysis of Public Retirement Systems

Underfunded public pension systems present a difficult challenge for policymakers. Each pension plan involves a unique and complex web of assumptions and funding decisions, the impact of which can take decades to fully realize. Reason Foundation’s Pension Integrity Project creates actuarial modeling built to show how each pension plan—with its unique structure—would react to a range of possible scenarios and outcomes. This one-pager explains how Reason develops these pension models to provide policymakers with accurate and tested long-term forecasts of costs, contributions and funding, market results, and benefit values. By demystifying the complex nature of retirement reform, stakeholders can focus on quantifiable long-term impacts to guide their decisions. If you’d like more information on our public pension modeling, please email Zachary Christensen.

Testimony on Alaska House Bill 22

The Alaska Legislature continues to evaluate several bills that could reopen the state’s defunct defined benefit (DB) pension plans. House Bill 22 and Senate Bill 35 would allow current public safety workers to convert their defined contribution benefits into a DB pension benefit and make the now-closed pension plan available for new hires. In testimony to the Alaska House State Affairs Committee, Reason Foundation’s Ryan Frost warns of the costs and risks the state could take on with this proposed rollback of reforms. Just like the pension Alaska closed in 2006—and remains over $5 billion short in funding—the new plan relies on overly optimistic investment returns and does little to balance risk between employees and state employers. Before undoing years of progress, Alaska policymakers should consider the bills’ potential long-term costs to state budgets, which the Pension Integrity Project predicts could be upwards of $800 million.

Actuarially Determined Contributions Would Reverse Montana’s Pension Debt Trends

While Montana has periodically responded to the need for higher contributions, the state’s policy for funding the Public Employee Retirement System (PERS) has often led to insufficient payments for the benefits promised to public workers. Reason finds Montana has been short on its payments in 12 of the last 20 years, contributing significantly to the more than $2 billion in unfunded pension liabilities. If the state adjusted its contribution policy to make annual payments based on actuaries’ projections, it could greatly slow the growth of pension debt and save taxpayers money by reducing expensive interest on that debt.

Survey Finds Pensions Are Not a High Priority for Young Government Workers

While governments must attract and retain valuable public workers, this is more challenging as the modern workforce changes jobs and locations more frequently. Many policymakers favor competing for employees using retirement benefits, but recent polling suggests this approach may be misguided. Summarizing a survey of young potential public employees by MissionSquare Research Institute, Reason’s Jen Sidorova explains that retirement benefits rank below several other considerations like salary and job security. Since today’s workers say they are more interested in overall job satisfaction, policymakers should explore several compensation and quality-of-life options to recruit and retain public employees.

Ways the SECURE Act 2.0 Can Help People Save for Retirement

The SECURE Act 2.0, the Setting Every Community Up for Retirement Enhancement Act of 2022, makes several changes to improve employer-sponsored defined contribution plans. Reason Senior Fellow Rod Crane outlines some of the law’s adjustments, including plan participation improvements, more flexibility in tax rules, and expanding distribution options. The changes coming from SECURE 2.0 are a positive step to optimizing defined contribution plans as vehicles for retirement security.

Chicago Wants to Open a Casino to Help Pay Down Its Public Pension Debt

Facing significant pension funding shortfalls, Chicago hopes to dedicate revenue from a soon-to-open casino to pay down the city’s unfunded public safety plan liabilities. Reason’s Swaroop Bhagavatula explains that the estimated $200 million in annual revenue would not eliminate the city’s $12.5 billion pension debt. To fully address pension underfunding, Chicago must tackle the systematic issues that created the pension debt.

News in Brief

Report Examines Trends that Could Impact Pensions in 2023

A recent report by S&P Global Ratings highlights key pension trends to look for in 2023. Funded ratios and investment returns are likely to continue the downward movement. According to the report, following significant negative returns in 2022, average returns were around -1% for the second half of 2023. As a result, S&P expects funded ratios to drop around four percentage points in 2023. The report also examines the impact of lasting inflation on public pensions. Higher inflation could mean higher discount rates, which could be good for plans in their funding projection. On the other hand, wages and benefits will eventually rise faster due to inflation, which will generate unexpected costs. The report also expects pension obligation bonds to be impacted by higher interest rates. With increasing rates, states cannot issue the bonds as easily and thus cannot use them to pad budgets as much as before. Lastly, the report focuses on trends in payroll growth. Slowing payroll growth may create the need to adjust assumptions down, which would necessitate higher contributions. The full report is available here.

Actuarial Best Practices for Funding Pensions Via Fixed Contribution Method

While public pension plans must calculate the amount needed in contributions to fully fund promised benefits, many governments—seeking to maintain predictability and stability in annual budgets—elect to circumvent this actuarially set amount with contributions set in statute. A new practice note from the American Academy of Actuaries details the challenges a statutory contribution policy (or, as they call it, fixed-rate pension funding) can create for a plan striving for 100% funding. If they do not move to respond to year-to-year experience, fixed contribution rates inevitably generate either underfunding or a need to adjust benefits. The actuarial practice note suggests that governments that continue to use contributions set in statute enact explicit objectives that foster frequent evaluation and adjustment of current rates. Objectives should push policy toward full funding, and policymakers should prioritize long-term funding over contribution decreases or benefit enhancements. The full practice note is available here.

Quotable Quotes on Pension Reform 

“[S]trong market returns…brought the aggregate plan funded status from a low of 66.0% as of March 31, 2020, to a peak of 85.5% as of December 31, 2021. These two endpoints represent both the lowest and the highest funding levels we have measured since our study began in 2012. However, the robust run-up in funded status proved to be short-lived, as markets dropped significantly in April 2022 and have been quite volatile in the months since.”

—Rebecca A. Sielman and Richard L. Gordon, in Milliman’s “2022 Public Pension Funding Study,” Milliman.com, Feb. 2023.

“Trustees should concern themselves with institutional investment policy, the principal focus of which is controlling risk and ensuring liquidity. In practice, however, trustees have allowed their deliberations to encompass elements of active investment strategy.”

—Co-founder of consultant firm Ennis Knup Richard Ennis in “Richard Ennis Has a Fix for Governance. No One Will Like It.” Institutional Investor, Feb. 14, 2023.

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides technical assistance for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other government reforms at Reason Foundation’s website and Twitter @ReasonPensions. As we continually strive to improve this newsletter, please send questions, comments, and suggestions to zachary.christensen@reason.org.