Analysis Confirms Reliability of Public Pension Plans

11/30/2017

Despite volatility in the financial markets over the last quarter century, state and local pension plans met their benefit payment obligations and – with few exceptions – earned more each year than they paid out.

The findings are contained in a new study by the National Conference on Public Employee Retirement Systems (NCPERS), which analyzed data from 6,000 public pension plans. The report, titled Don’t Dismantle Public Pensions Because They Aren’t 100 Percent Funded, was released in November 2017.

“Our analysis demonstrates that pension plans can tolerate ups and downs in the markets and still meet their current obligations,” said Hank H. Kim, NCPERS’ executive director and counsel. “While funding ratios are an important actuarial tool, they are not a proxy for a plan’s ability to pay benefits here and now.”

In the study, researchers found that a public pension plan’s funded status has little correlation to its ability to pay promised benefits. As long as annual contributions and investment income exceed benefit payments, pension funds can continue to operate in perpetuity regardless of their funded status, according to the study.

NCPERS analysis revealed that between 1993 and 2016, contributions and investment earnings taken in by public pension plans exceeded benefit obligations in all but four years. During those four years – 2002, 2008, 2009, and 2012 – all plans still met their pension obligations. 

Critics of public pensions claim they are underfunded, citing funding ratios of less than 100% as evidence of pressing financial problems. Kim calls such claims “faulty logic,” pointing out that contributions and earnings continue to flow into plans even as benefits are paid out.

“Shutting down a pension plan because it is not fully funded is like turning in the keys to your home because you can’t pay off the entire mortgage balance this month,” Kim said. “It is an incredibly short-sighted action that destabilizes workers and their communities.”

NYSTRS is one of the best-funded public pension plans in the nation. As of its most-recent valuation, the System’s plan was approximately 98% funded using both actuarial and market value calculation methods. NYSTRS has made benefit payments on time and without fail throughout its nearly 100 year history.

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