Pension underfunding has dominated the media and created significant concerns for state lawmakers as they struggle to bring their fiscal houses in order. Before any reforms can be enacted, certain questions must be answered: in reality, how large are the funding shortfalls, and what are the legal boundaries within which reforms can take place? These questions and more are addressed in a series of three research papers commissioned by AEI through a generous grant from the Smith Richardson Foundation. In the series, Andrew G. Biggs and Kent Smetters present the case for market valuation, while Paul Angelo explains how current pension valuation practices are useful to policymakers, and Amy Monahan discusses the legal restrictions surrounding pension reform.
Kent A. Smetters and Andrew G. Biggs
Public pension accounting is undergoing changes as the GASB looks to revise its rules through the recently introduced Statements 67 and 68, even if these do not alter the basic logic — or illogic — of how public pensions value their liabilities. Moreover, public plans themselves are being reformed in a number of states, principally through higher employee contribution rates and lower benefits for newly hired employees. But pension financing will not truly be stabilized until plans first adopt better standards for determining how much they truly owe.
With US state and local economies in slow recovery, workforce costs — including pensions and other benefits — remain front-page news. Taxpayers and public officials want to know the size of their financial obligations to employees and retirees for retirement benefits to assess how much it will cost — today and in the future — to meet those obligations.
For a wide variety of reasons, many states and municipalities are turning a critical eye toward their employee retirement plans. As various parties debate the merits of different reform measures, it is important to keep in mind that in many states, the law limits potential reform options.
About the Authors:
Andrew G. Biggs is a Resident Scholar at the American Enterprise Institute where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.
Kent A. Smetters is the Boettner Professor of Business Economics and Public Policy at the Wharton School, University of Pennsylvania, and an adjunct scholar at AEI.
Paul Angelo is a senior vice president and actuary for The Segal Company and currently serves as the valuation actuary for 16 major California county and city retirement systems and associations, as well as for the University of California Retirement Systems.
Amy Monahan is a professor and the Solly Robbins Distinguished Research Fellow at the University of Minnesota Law School.