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Retirement Issues for the 21stCenturyNational Press FoundationWashington, D.C.
June 13, 2011Diane OakleyExecutive DirectorNational Institute on Retirement Security
The Future of Public Pensions
www.nirsonline.org
Why Increased Focus on Public Sector & Pensions?
Source: New American Foundation, Bureau of Labor Statistics, Westwood Capital
• Seen inaccurate assertions in outsized growth of public sector employment.
• Middle class jobs in the private sector are disappearing.
• The share of middle income jobs in the U.S. fallen from 52% in 1980 to 42% in 2010.
• Middle income jobs have been replaced by low income jobs, which now make up 41% of total employment.
Private Sector: Lower Income Now, Less Retirement Security Later
Source: New American Foundation, DOL, PBGC, EBRI
Private Sector Workers Participating in Employer Based Retirement Plan by Plan Type, 1979-2008 (all workers)
Source: New American Foundation, Bureau of Labor Statistics, Westwood Capital
Wall Street Meltdown Dealt Severe Blow to Middle Class
Source: New American Foundation, Bureau of Economic Analysis
• Household net worth declined from $65.7 trillion in the second quarter of 2007 to $56.8 trillion in the fourth quarter of 2010.
• Wealth recovered $8.1 trillion since the first quarter of 2009, due mostly to recovery of stock prices.
Already, Severe Private Sector Shortfall in Retirement Savings
•The median value of retirement savings for retirees is $45,000
•The average retiree has a retirement savings shortfall of $47,732, with larger shortfalls among low-income Americans
•Many Americans were relying on rising home values to finance their retirement and have under saved.
Great Recession Fallout on Middle Class: Home Equity & Wealth
Source: New American Foundation, Kennickell (2009)
• Home equity makes up a greater share of wealth for the middle class than for wealthy families.
• For families up to 90th percentile of net worth, home value makes up 50% of worth.
• However, significant decline since 2007, Case Shiller Home Price Index declined by 30%, could fall another 10-20%.
• Don’t forget – 23% of all residential mortgages underwater.
Public Pensions: Strong Financials for Most Plans Going into Financial Crisis
Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999)
Funding Ratio (Percent)
Distribution of Funded Ratios for 126 Largest State, Local Pensions, 2010
Vast Majority of Public Plans Well Funded
Source: Center for Retirement Research, Boston College
Public Pensions Showing Strong Recovery
Change in Combined Assets of State & Local Government Pensions: 2003 – 2010
Source: National Association of State Retirement Administrators
Years ended as of 12/31/10
Median annualized public pension fund investment returns for periods ended 12/31/10
Strong Investment Returns:Exceed 8% Over Two Decades
Source: NASRA based on Callan Associates Data
Historical Snapshot: Investment Returns
Source: Gabriel, Roeder, Smith & Company
Using Theory Rather Than Reality Artificially Inflates Public Pension Costs
Risk-Free Rate Leads to Increased Costs
Source: Government Finance Review, February 2011
Using Theory Rather Than Reality Artificially Creates Surplus
Risk-Free Rate Leads to Excess Funding
Source: Government Finance Review, February 2011
Public Pensions Are Small Portion of State/Local Budgets
Source: U.S. Census Bureau
Employer (taxpayer) contributions as a percentage of all state and local government spending, FY 08
On Average, Public Pension Benefits Modest, With 30% of Workers Not Eligible for Social Security
Source: U.S. Census Bureau
Employee and Employer Pension Contributions, 1982 to 2009
Public Pensions Typically Are Shared Funding Responsibility
Source: U.S. Census Bureau
Public Pensions Implementing Changes to Ensure Long-Term Sustainability
Source: Government Finance Review, February 2011
• By itself, freezing plan does nothing to close and funding shortfalls
• Freezing plan undermines the economics of the plan by starving it of new entrants
• Because of accounting regs, plan costs can actually increase
• Undermines retirement readiness
DB to DC Switch Not a Viable Solution
Source: National Institute on Retirement Security, Look Before You Leap
Pensions Make Sense for Public Sector Sector Employers, Taxpayers
“State and local governments also have a strong comparative advantage relative to private industry in offering pension benefits.
Since many of the most common government jobs—firefighter, police officer, corrections officer, regulatory overseer—have no direct private sector analog, the lifetime-with-one employer career path scorned by many in the private sector makes a lot of sense for government employees.”
Eli Lehrer, Heartland Institute, Weekly Standard, March 28, 2011
84% Americans Concerned Current Economic Conditions Hurt Retirement
American Retirement Panic Attack
Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A Roadmap for Policymakers
Private Sector Wants Pensions
81% of Americans Say They Need Pension For Independence, Self-Reliance
Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A Roadmap for Policymakers
Regulations, Funding Volatility Kill Private Sector Pensions - Not Costs
Corporate vs. Public Pension Funding Levels, Costs
Comparison of corporate and public pension funding levels, 2000 to 2010
Comparison of change from prior year in corporate and public pension contributions, 1989 to 2009
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
0%
40%
80%
-20%
20%
60% Corporate
Public
U S D ep t o f L ab o r, U S C en su s B u reau ,M illim an
*
*Estimate
00 01 02 03 04 05 06 07 08 09 10
80%
100%
120%
FundingLevel
Corporate
Public
W ilsh ire , M illim a n , an dP u b lic F u n d S u rvey
*
*E stim ate
Regulations, Funding Volatility Kill Private Sector Pensions - Not Costs
Cost of DB and DC Plan as % of Payroll
12.5% 22.9%0%
5%
10%
15%
20%
25%
DB Plan DC Plan
DB Cost
No Longevity Risk Pooling
Less Balanced Portfolio
Lower Returns/Higher Fees46% Savings
Pensions Most Economically Efficient Retirement Plan: HALF the cost
Source: National Institute on Retirement Security, A Better Bang for the Buck
The Real Retirement Issue?Underfunded Individual Accounts
Source: Michael Kitces, The Nerd’s Eye View in The New York Times
Future Outlook?
• Public pensions will continue to recover.
• States will continue to implement changes to ensure long-term pension sustainability.
• State & local government will continue to offer pensions with supplemental DCs.
• Watch for NIRS forthcoming study on public pension sustainability.
Additional Resources
• American Benefits Council – Lynn Dudley• Boston College Center for Retirement Research – Alicia Munnell• Chamber of Commerce – Aliya Wong• Center on Budget and Policy Priorities – Elizabeth Liz McNichol• Center for Economic & Policy Research – Dean Baker• Center for State & Local Govt. Excellence – Beth Keller• Groom Law Group – Ian Lanoff• ERISA Industry Committee – Mark Ugoretz• Employee Benefits Research Institute– Dallas Salisbury• Government Accountability Office – Frank Todisco• Heritage Foundation – David John• National Assn. of State Retirement Administrators – Keith Brainard• Penn State University – Ron Gebhardtsbauer• Segal Company – Cathie Eitelberg• University of Massachusetts – Christian Weller• Yale University – Jacob Hacker
