Those who seek to privatize Social Security and state retirement plans covering public employees like to characterize these earned retirement programs as “Ponzi schemes” or “pyramid schemes.” This is the kind of hyperbole that substitutes for fact for those who are philosophically or ideologically opposed to defined-benefit pension programs. There’s something about the efficiency of pensions that irritates our detractors.
Public-pension plans are an ongoing and very long-term proposition. Teachers, public-safety officers, snowplow drivers and road-repair workers pay into their pension plans when they begin their careers, which might span 40 years, and receive retirement benefits until they die. This is why we manage public-pension funds with an indefinite horizon in mind. We continually monitor projections and regularly propose benefit and contribution changes to the Legislature to keep the plans on sound financial footing well into the future.
In response to an increase in liabilities due to longer member life spans and lower expected future investment returns, the Teachers Retirement Association (TRA) has proposed $1.6 billion in benefit reductions and $92 million in annual contribution increases, and the Minnesota State Retirement System (MSRS) has proposed $1 billion in benefit cuts and $37.5 million in annual contribution increases. The Public Employees Retirement Association (PERA) board is currently considering options to pursue in 2018.
Critics of public pensions respond that states and their taxpayers can’t afford these plans. In fact, Minnesota pensions are efficient: Government spending on pensions is only 2.3 percent of total state and local spending here, compared with 4.5 percent nationally. In addition, Minnesota’s pensions are prefunded, meaning the systems have more than $64 billion in the bank. That money is invested by the State Board of Investment and earns more money. For the year ending June 30, 2017, we earned 15.1 percent on investments. SBI’s average return is 10.2 percent over 35 years.
This successful investment program keeps taxpayer cost low, since the majority (73 cents of every dollar) of what is needed to pay benefits comes from investment gains. Well-funded plans reduce the reliance on future contributions.
In an August paper, the National Conference on Public Employees Retirement Systems said that public pensions are “beneficial to taxpayers in a variety of ways that are both underreported and poorly understood.” Indeed, Minnesota taxpayers pay only about 14 cents on the dollar for public pensions and benefit from millions of dollars in pension fund assets invested in our economy. And retirees typically spend their pension checks locally, supporting businesses and job creation.
But the complexity of public-pension finance makes it easy to mischaracterize or cherry-pick data. For example, we are required by the Governmental Accounting Standards Board (GASB) to report certain data annually using accounting methodology. Financial results using this method are simply a snapshot in time and do not anticipate any future course corrections or adjustments.
Long-standing actuarial methods of projecting funding status progress are more useful for plan administrators and policymakers because they are future-focused. The year-to-year GASB numbers will fluctuate wildly due to market swings and do not provide appropriate guidance for oversight of pension funding, which is best viewed through a long-term lens.
Public-pension opponents use data selectively to lobby for switching public employees to 401(k)-style retirement accounts. In 2011, the retirement systems conducted a study and found that closing the pension plans and switching to a 401(k)-type system would cost the state $3 billion. Benefits would still be paid to those in the legacy plan even as contributions were diverted to private accounts. Studies have shown that the U.S. has a retirement crisis as workers reach retirement age without adequate savings. Switching public employees to a wholly private savings system would be bad for Minnesota.
The state’s pension funds are not in crisis. Minnesota has a long history of taking appropriate corrective action when necessary, and now is one of those times. We urge lawmakers and the governor to act on our proposed reforms. With their help, Minnesota’s public-pension plans will be financially sound for many years to come.
Doug Anderson, Erin Leonard and Jay Stoffel are the executive directors, respectively, of the Public Employees Retirement Association, the Minnesota State Retirement System and the Teachers Retirement Association.