Practical analysis for investment professionals
11 March 2014

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.

Andrew G. Biggs

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.

Keith Brainard

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.

Hank H. Kim

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.

Robert Novy-Marx

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.

Ronald J. Ryan, CFA

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.

David A. Stella

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.

M. Barton Waring

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.

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

23 thoughts on “The US Public Pension Funding Crisis (Online Forum)”

  1. Chris Tobe says:

    I have written a book on this “Kentucky Fried Pensions” and talked at a number of forums. Kentucky at 23% and falling has the worst funded state plan – worse than any of the single Illinois plans. I was a trustee of this plan from 2008-2012 and no one in government cared, and the local and national media ignored a number of my pleas for attention to the issue.

    Chris Tobe, CFA

  2. larrabeecfa says:


    Thanks for visiting our Enterprising Investor blog and for sharing your book title. It sounds like you have some unique insights. Please consider contributing to our March 18 forum.


  3. Tough Love says:

    For serious discussion consideration at your forum….

    I believe that way to much focus has been given to not adequately “funding” promised Public Sector pensions. Clearly the ROOT CAUSE of the problem is excessive pension “generosity”. There seems to be a serious lack of understanding that “funding” FOLLOWS “generosity”, and that very generous pensions are very costly and will always be difficult to fully fund (over the working careers of the employees).

    It’s a rather minor mathematical exercise to show that the MUCH richer Public (than Private) Sector pension formulas together with the MUCH more generous “provisions” (e.g., very young unreduced full retirement ages, COLA increases, etc.) results in Public Sector pensions that are always multiples greater in value at retirement than those of their comparably paid Private Sector counterparts. It’s this excessive and unnecessary (to attract and retain a qualified workforce) generosity that must be reformed … and to have any near-term financial impact, such reforms must include the FUTURE Service of all CURRENT, and not just new workers

  4. Jacques R Gagné says:

    The Society of Actuaries has just published the Report of the Blue Ribbon Panel on Public Pension Plan Funding. It recommends, among other things, that the plan liability at risk-free rate be disclosed, along with plan funding calculation. Andrew Biggs was a panel member, Jeremy Gold was interviewed and Barton Waring should have been interviewed. Could those three people express their reactions to the publication of the above-mentioned report?

    I’m always amazed at how quick the public points to a reduction of employee pension benefits as the first solution to the financial difficulties of states or municipalities. Pension plan participants are owners of deferred salaries, just like bondholders are owners of deferred interest payments. Shouln’t the credit ranking of pension plan participants be more clearly established?
    Jacques R Gagné, CFA, CIPM, FSA
    Quebec City

    1. Tough Love says:

      If the much more generous Public (vs Private) Sector pensions is … under a reasonable examination of the evidence …. likely due to collusion between the Public Sector Unions and our elected representatives (specifically, a trading of campaign contributions and election support in exchange for favorable votes on pay, pensions, and benefits), is it not appropriate and fair (to the Taxpayers that have been betrayed by their elected representatives) to seriously consider reductions in such excessive pension promises ?

      While doing so for PAST service would indeed be difficult (even if justifiable), it seems that exploring all legal avenues to do so would be appropriate for the FUTURE Service of all CURRENT workers, as each day that we delay in taking such actions, the financial hole we are in gets deeper and deeper.

      1. Jacques R Gagné says:

        I can see three (not two) degrees of difficulty and three degrees of fairness here:
        a) modifying past service for current workers: most difficult and most unfair
        b) modifying future service for current workers: somewhat difficult and debatable as to fairness depending on the promise that was made to current workers at time of hire
        c) modifying future service for future workers: not difficult and can be done in a fair way as long as future cost is transparent as part of total renumeration.

        1. Tough Love says:

          Jacques, Re your item “b” …..

          While I am not familiar with the rules that govern pension plan changes in Canada, in the USA, Private Sector pensions are regulated via ERISA, the 2006 PPA, etc. and it is both legal and quite commonplace for Private Sector Plan sponsors to lower the FUTURE Service pension accrual rate, or even freeze the Plan completely.

          With the direct contributions from Public Sector Pension Plan participants (INCLUDING all the investment earnings thereon) rarely paying for more than 10-20% of the Total Cost of their VERY generous promised pensions … leaving the 80-90% balance the “responsibility” of the Taxpayers (even though they have been quite tardy in putting up the funds to do so) ….. what justifies not only the MUCH more generous pensions (AND benefits), but also FAR FAR greater protections from change?

          Now, I’m not saying that such FUTURE Service reductions will be easy, and I’m well aware that the ability (and avenues) to do so vary greatly from State to State. What I AM saying is that FAIRNESS to the Taxpayers does indeed make such FUTURE Service reductions a very appropriate place to look for the VERY much needed pension reform. In fact, I venture to say that reductions only applicable to NEW workers will be “to little, too late” to head off the growing list of municipal bankruptcies teetering on the horizon.

          1. Mitchell Serota says:

            Jacques has a more complete understanding of Public Pension Plans in the US. They do NOT fall under ERISA as Tough Love wishes they would. I second Jacques’ observation that there should be commentary from the participants of the Blue Ribbon Panel and especially from actuaries.

          2. Tough Love says:

            Michael Serota,

            First, you said “They (Public Sector pensions) do NOT fall under ERISA as Tough Love wishes they would.” Where did I suggest that?

            Second. What did I say in my comment to which you responded, that is not true ? Please be specific.

    2. Exactuary says:

      I think you will find Jeremy Gold’s comments on BRP in this thread:

  5. Gene says:

    Regarding Kentucky, there have been some reforms. Could the panel comment on the KY reforms as discussed in this Pew research?

  6. John Douglas says:

    Tough Love:
    It is not helpful to use value-laden verbiage such as “excessive pension generosity.” It is not at all clear that the root cause of the underfunded pensions in the U.S. is that they are “overly generous” or “excessive”. The root cause, as you know in your heart but probably don’t care to admit, is that the proper funding was not put in place, coupled with the worst decade for investment returns in a century (which was mainly the result, again if you would care to admit it, of the lack of ethics in the Wall Street firms that created the 2001 and 2008 financial downturns). Insisting that government should welch on the promises made would only compound the problem by increasing income disparity. I don’t know what you were taught growing up, but I was taught that when you make a promise, you keep it. That is what integrity is all about. You don’t make a promise and then welch on it when it becomes inconvenient for you.

    1. Tough Love says:

      John Douglas,

      I recently posted a mathematical demonstration that for a Private Sector worker (lucky enough to be one of the small number that still have Traditional-style final-average-salary DB pension Plans), to get the same pension (at the same age and with the same years of service) as the TYPICAL California Safety worker retiring with a salary of about $111K, he/she would like need a salary greater than $500K.

      While CA Safety worker pensions are near the highest in the nation, similar calculations for Public Sector workers with more typical pensions ALWAYS show pensions that their are multiples greater in value in value at retirement. Clearly, the ROOT CAUSE of the problem is excessive Public Sector pension generosity, with funding difficulties arising from that excessive generosity

      And while I agree that to “welch on the promises made” is normally a bad idea, if those promises were made with nobody at the bargaining table rightfully looking out for Taxpayer interests, and with the two sides (the Public Sector Unions and our elected officials or their representative) acting in collusion by trading campaign contributions and election support in exchange for favorable votes on pay, pensions, and benefits, then yes, welching on SUCH promises is both necessary and the right thing to do.

      You can find my referenced demonstration in the comments to this article:

      1. Douglas47 says:

        4.62 times? Again?

        The only logical argument you are making is that, by contractual agreement, the safety workers employer is diverting roughly thirty three percent of his total compensation to a pension account, and the private sector workers employer is diverting six percent. By contractual agreement.

        One employee is deferring MUCH more of his compensation.

        The math is misleading and irrelevant.

        Nothing to see here, folks.

  7. larrabeecfa says:


    Thanks for visiting our blog and for sharing the Pew report on Kentucky. I hope to include in this forum some discussion on the efficacy of reforms that states like Kentucky have instituted.


  8. Jim Palermo says:

    I will not be able to listen live, but I hope the panel can find a few moments to take up the quality of the actuarial assumptions, aside for investment return rate and the GASB mandated discount rate which must equal the expected investment return. Specifically, I am concerned about the mortality rates used by smaller plans which enable smaller plan contributions by municipal employers. Plan governance must be improved in order to identify and correct decades old mortality assumptions and the actuarial profession must begin to police itself better.. Please let us know how we can watch the discussion at a later date.

  9. Tough Love says:

    As I follow the commentary of certain panel participants a famous quote comes to mind ….

    “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
    ― Upton Sinclair

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