Putting Pension Projections in Perspective

Critics of pension reform cite certain actuarial reports claiming that shifting new employees to a defined contribution plan (like a 401(k) in the private sector) will actually cost taxpayers more.  These reports need to be read in context of what pension actuaries can actually determine, what assumptions are being used, and what taxpayers will contribute absent reform.

1)  Actuarial reports compare costs which are fixed and known in a defined contribution plan to costs which are unknown and indefinite, but estimated, in current Defined Benefit plans.

2)  These estimates assume current plans will return 7.5% on investments every year going forward, and that future politicians will keep fully funding these plans.  Both assumptions have already proven false, which has created a $47 billion unfunded liability.

3)  Under Act 120—assuming both 7.5% investment return and lawmakers continue to make payments as scheduled—taxpayers will pay $212.4 billion over the next 30 years towards SERS and PSERS costs.[1]

4)  Assumptions that closing defined benefit plans require less risky investments that will result in lower investment returns have been dramatically overstated.  As noted by Pew Charitable Trusts Senior Researcher David Draine in testimony to the House State Government Committee (emphasis added):   

In the final years of the plan’s existence, the plan may want to keep its investments in less risky and more liquid assets.

But this will happen only in the last few years of the plans’ existence, not in the near future as claimed by the actuaries for the State Employees and the Public Schools’ plans. For example, the actuary for the State Employees’ plan suggests that in 2024 the pension plan should start moving its investments into safer assets. For 2013, actuarial projections for the state employees plan estimate that benefit payments will equal 11.3 percent of plan assets. That same projection estimates that for 2024, benefit payments will be equal to 11.6 percent of plan assets. If liquidity concerns in 2024 will be so great that plan assets need to be in less risky investments than those same changes should be occurring today, regardless of any pension policies under consideration.

[1] SERS Supplemental Budget Information  http://www.portal.state.pa.us/portal/server.pt/document/1324311/budgetbinder2013_pdf;  PSERS Current Employer Contribution Rate and 30-Year Rate Projections http://www.psers.state.pa.us/content/pfr/resources/contributions.pdf