The US Public Pension Funding Crisis (Online Forum)
Worldwide, the financial health of government pension systems is threatened by struggling economies, adverse demographics, fiscal woes, and, in some cases, lax accounting standards. The crisis is particularly acute in the United States, where state and local governments’ defined benefit pension plans are underfunded by more than $4 trillion, putting at risk the financial security of approximately 8 million retirees and 14 million workers. The state of Illinois remains the poster child for state pension plan mismanagement, but it is hardly alone.
On the local level, Detroit, Michigan is the biggest casualty, citing $3.5 billion in unfunded pension liabilities in its 2013 bankruptcy filing. Unsustainable pension costs have similarly pushed Jefferson County, Alabama, and the cities of Stockton and San Bernardino in California into bankruptcy in recent years. In a bid to avoid the fate of Detroit, many public pension plans are now trying to play catch-up and taking on more risk by investing more than ever in equities and alternative investments. But rolling the dice in such a way could very well deepen the crisis.
In his just-released annual letter to Berkshire Hathaway shareholders, Warren Buffett warned,
“Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remain a mystery to most Americans. . . .
“During the next decade, you will read a lot of news — bad news — about public pension plans.”
As Buffett suggests, the underfunding of public pensions is as much a political problem as it is an actuarial one. State and local governments have overpromised and have been unwilling to institute meaningful reforms, while flawed accounting rules have served to hide the true costs of pensions and even promote excessive risk taking on the part of plan managers.
Retirement security is a focal point of the Future of Finance initiative at CFA Institute, and we’ve assembled a panel of experts to discuss the funding crisis at public pension plans in the United States. Topics to be explored will include the size and scope of the problem, its causes, and potential solutions. Though focused on the United States, this conversation will likely have application across the globe.
Our distinguished panel will include: Andrew G. Biggs, resident scholar at the American Enterprise Institute; Keith Brainard, research director for the National Association of State Retirement Administrators (NASRA); Hank H. Kim, executive director and counsel for the National Conference on Public Employee Retirement Systems (NCPERS); Robert Novy-Marx, associate professor of finance at the Simon School of Business, University of Rochester; Ronald J. Ryan, CFA, CEO and founder of Ryan ALM; David A. Stella, president of Pension Management Advisors; and M. Barton Waring, retired global chief investment officer for investment strategy and policy at Barclays Global Investors.
The discussion will be held on 18 March 2014. If you’d like to share your perspective or pose a question to our panelists, scroll to the bottom of this post and leave a comment. Or send a tweet to @LarrabeeCFA. We’ll do our best to incorporate your thoughts into our discussion.
Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits. He has published widely in academic publications, as well as in daily newspapers such as the New York Times, the Wall Street Journal, and the Washington Post.
Brainard is research director for the National Association of State Retirement Administrators (NASRA). He is coauthor of The Governmental Plans Answer Book, and he created and maintains the Public Fund Survey, an online compendium of public pension data sponsored jointly by NASRA and the National Council on Teacher Retirement. Brainard has discussed public pension issues before Congress, state legislative committees, public pension boards of trustees, and on multiple media outlets.
Kim is executive director and counsel for the National Conference on Public Employee Retirement Systems (NCPERS). He directs the day-to-day operation of the largest public pension trade association in the United States. His responsibilities include strategic planning for NCPERS, promoting retirement security for all workers through access to defined benefit pension plans, and the expansion of NCPERS’ role in the continuing debate on health care.
Novy-Marx is an associate professor of finance at the Simon School of Business, University of Rochester. He earned the American Real Estate and Urban Economics Association Dissertation Award in 2005 and the Western Finance Association’s Trefftz Award in 2004 for “An Equilibrium Model of Investment Under Uncertainty.” In addition, Novy-Marx’s “Hot and Cold Markets” won the 2010 Mill’s Prize for the best paper in real estate economics.
Ryan is CEO and founder at Ryan ALM, Inc., which specializes in custom liability indexes and liability beta portfolios. Previously, he was founder and president of Ryan Labs and Ryan Financial Strategy Group and director of fixed-income research at Lehman Brothers. Ryan is author of the book, The U.S. Pension Crisis.
Stella is president of Pension Management Advisors, a company that provides consulting to employers and individuals on pension and retirement matters. He currently serves as the president of AARP Wisconsin, and recently served as the secretary of the Wisconsin Department of Employee Trust Funds. Stella has also served as a trustee of the State of Wisconsin Investment Board and was president of the National Council on Teacher Retirement. He has 26 years of public pension plan management experience and holds the Certified Employee Benefit Specialist (CEBS) designation.
Waring is the retired global chief investment officer for investment strategy and policy at Barclays Global Investors. He is also an award-winning author of many articles on pension investment and discount rate issues, and author of the book, Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back Under Your Control.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
