Pension Boards Must Get Real When it Comes to Numbers and Challenges
Public pensions are a massive burden to US taxpayers at the city, county and state level. Unfunded liabilities are a major cause of decaying or delayed infrastructure, crowded and decaying schools, underequipped first responders and subpar government services. San Diego has an unfunded pension liability of $2.5 billion, while the county of San Diego’s debt is $3.3 billion. California is staring down a debt in excess of $100 billion to its pension.
Pension sponsors must pay down these unfunded liabilities (like paying a mortgage) annually. But unlike a mortgage, the balance due doesn’t necessarily go down each year.
In years where the plan’s actuary determines people are living longer, inflation exceeds expectations, or in years where investment returns do not meet their target, the pension deficit can grow.
This happens far too often, and it hurts the ability of governments to provide essential services. San Diego must pay $324.5 million on its pension debt during this fiscal year alone, 24% of the general fund budget.
Many say that poor investment results related to the 2008 global financial crisis are the culprit for underfunding, but the bigger culprits have been poor actuarial assumptions and pension boards that adopt unrealistic assumptions, choosing to satisfy the short-term desire for lower employee and employer payments. It’s like paying the minimum on your credit card each month—not a good idea.
Pension boards need to adjust assumed rates of return, inflation assumptions and life expectancy to be more realistic. Current workers need to contribute more toward their retirement or reduce benefit expectations. The retirement age for newly hired workers must be extended. Public employees have earned their pensions, but they and their unions need to accept the reality of the true cost.