Numbers Suggest DP Plans Add Value
Public pensions are under attack from special interest groups challenging long-standing accounting principles and concluding public pension plans are underfunded.
Our response: Don't believe everything you read.
The facts are NYSTRS remains among the best funded public pension systems in the nation and possibly the best funded teachers' system. That's according to the National Association of State Retirement Administrators (NASRA). Independent auditors who review our finances annually and the New York State Insurance Department which audits us periodically also agree our funding is strong.
Using accredited standards established by the Actuarial Standards Board (ASB) and the Governmental Accounting Standards Board (GASB) – standards reputable public funding experts support the use of when calculating liabilities – NYSTRS is fully funded. This means there are sufficient assets to provide current and future benefits promised to all 139,000 retirees and beneficiaries, as well as the funds to pay the accrued benefits of all 280,000 active members.
Even if we were not fully funded, we would be considered financially sound. According to an April 9, 2010 article in the Wall Street Journal, "State public pensions are generally viewed as adequately funded at the 80% level because…governments generally don't face the same risks of bankruptcy that companies do."
Recent studies attempting to cast doubt on public pension funding methods based their calculations on expected rates of return much lower than the 8% annualized average NYSTRS and many other public pension plans use. Two such reports characterize an 8% assumption as "aggressive" and "unrealistic."
Again, the facts do not support this claim.
Over the past 27 years, NYSTRS' rate of return exceeded the 8% assumption 18 times – or almost 70% of the time. In 17 of those 18 years, returns were in double digits. In 14 of those 17 years, returns were 13% or higher – or a minimum of 5% greater than the assumed rate of return.
Even with a record-low return of -20.5% in the fiscal year ended June 30, 2009 (the second consecutive year of decline) the System's 25-year rate of return was almost 10% (9.8%).
According to NASRA, since 1985, a period including three economic recessions and four years when median public pension fund investment returns were negative (including 2008), the median public pension plan rate of return was 9.25% – or 1.25% greater than the 8% rate labeled as "unrealistic" by critics.
Following are some other claims made by critics, followed by the facts:
The Claim: Taxpayers are shouldering the burden of paying lavish public pensions.
The Facts: Over the last 20 years, investment returns accounted for 86% of NYSTRS' income. During this same time period, the System took in $13.9 billion in member and employer contributions but paid out $54.4 billion – all while net assets more than doubled, from $27 billion to $72.5 billion.
The Claim: Legislatively mandated employer contributions to public pension systems are bankrupting employers.
The Facts: While employer contribution rates (ECRs) have been on the rise of late due to recent financial market declines, NYSTRS' ECRs have been in single digits for 21 (and soon to be 22) consecutive years. In eight of those years the rate was less than 4%; in six of the eight it was less than 1.5%. For three consecutive years earlier in this decade, the rate was less than 0.5%.
The Claim: Switching public pension plans from defined benefit (DB) to 401-k style defined contribution (DC) will result in cost savings.
The Facts: Historically, DB plans have achieved higher investment returns than DC accounts. According to the National Institute of Retirement Security (NIRS), a simple 1% difference in annual investment returns results in a 26% cost savings over a person's working career.
NIRS also concludes the economic efficiencies of DB plans make them nearly half the cost of 401-k style plans. Quite simply, DB plan assets are professionally managed at significantly lower fees than DC plans.
Statistics show the cost to operate a 401-k style DC plan is anywhere from $1.25 to $2.00 per $100 of assets. These appear as "fees" in benefit statements. By comparison, the median operational cost for that same $100 in a DB plan is 10 cents. NYSTRS does it even more cost effectively – about 7 cents per $100 of assets.
Some of the reasons this is true include economies of scale achieved through investment of pooled resources, mandatory participation by both employee and employer, and the fact government-run pension plans are not-for-profit organizations.
One other important note: Defined benefit plans can also provide reasonable death and disability benefits without requiring employers to obtain insurance and disability from separate carriers. This provides a substantial cost savings to employers.
Also not to be overlooked is the economic impact of a NYSTRS pension. The System paid out more than $5 billion in benefits for the fiscal year ended June 30, 2009. Of that total, more than $4 billion were paid to people living in New York. Those payments created a ripple effect through the state economy, as one person’s spending became another's income.
According to NIRS, each dollar "invested" in public pensions by New York taxpayers supports nearly $10 in total economic activity.
For more information on the Retirement System's assets and investments, review the NYSTRS annual report for the fiscal year ended June 30, 2009.
Also, read the article "Two Studies, One Conclusion: Public Pensions Are Healthy."
This article appeared in the Summer 2010 editions of Your Source and Resource.