Defending Public Pensions

DEFENDING PUBLIC PENSIONS
OPINION By EARL POMEROY and CATHIE G. EITELBERG
June 29, 2011

Over the past year, politicians, pundits and an array
of think tanks have put forth some frightening
predictions about public employee pension plans. A
misguided belief that pensions, particularly defined
benefit plans, are causing the fiscal stress of many
states is false. The widely held notion that 401(k)
plans can provide adequate retirement benefits is,
similiarly, a myth.

Here are some other major and oft-repeated
misconceptions floating around many statehouses
these days:

Myth: Public employee benefits are bankrupting
states. Not so. According to publicly available data
gathered from government websites, less than 4
percent of state budget expenditures go to funding
pension benefits. A recent study from the Center on
Budget and Policy Priorities concluded that state
budget shortfalls are largely a result of decreases in
tax revenue in part due to falling real estate values
and shrinking tax revenue in general.

Myth: Public pensions are overly generous. Hardly.
The most recent U.S. census data reveals the average
state employee has a retirement benefit of $22,000
per year.

Myth: Public pension funds are going broke and will
require billions in taxpayer bailouts. Nope, sorry. It
is a fact that the states' pension funds face a shortfall.
The Pew Center on the States recently pegged the
collective number at $660 billion, a far cry from the
$3 trillion figure being bandied about by some
professors.

Some forecasts, discussed in certain academic circles
and regurgitated unchallenged by the media, have
many public pension plans running out of funds by
2020. But these estimates are based on flawed
assumptions, such as no additional contributions
and long-term low investment returns. And, that's to
say nothing of the $3 trillion in assets public pension
plans hold to pay future benefits.

Yes, $660 billion is a big number, but manageable
when viewed over a long-term funding horizon, and
when coupled with recent plan revisions for new
employees.

Here is the simple reality about the bulk of today's
shortfall: It is the direct result of the fact that our
economy went off a cliff three years ago, sending
state revenues plummeting. As the overall economy
recovers, funding levels in most public retirement
plans will improve as well. Let's remember that
pensions are funded over the long-term and have
weathered previous swings in market returns.

Over the 25 year-period ended Dec. 31, 2010, the
median public pension plan has produced an
annualized return of 8.8 percent. For the years
ending 2009 and 2010, the median rate of return was
12.8 percent and 13.1 percent respectively. These
returns will not fully repair the funding deficit, but as
they are recognized by the plans over the next few
years, they will help with the recovery of asset levels.

Public plans are not relying only on investment
returns to mitigate the shortfall. In 2010, more than
20 states made changes to their pension plans to
bring down future costs. Over time, these revisions,
combined with employee and employer contributions
and investment returns, will restore stronger funding
for most pension plans.

As state and local legislatures across the country
consider scaling back and changing retirement
benefits of public employees, it is imperative that they
focus on the real challenges they're facing. The critics
are missing the real issue: the retirement security of
the coming wave of baby boomers, many of whom are
woefully unprepared for the financial demands ahead
of them. While a defined contribution plan should be
an important part of a retirement portfolio, it should
not be the sole source of retirement income.

Consider this: By 2020, one-fourth of the U.S.
population will be over the age of 65. The Employee
Benefit Research Institute reports that the average
balance in a DC plan will be only about $35,000, not
enough to live on through retirement.

Having so many people without adequate income will
have a devastating impact on the economy. This is the
real looming crisis you don't hear much about: a
growing segment of the population slipping into
poverty.

If we don't have some form of serious conversation
about America's retirement systems, one that puts
retirement security in a more positive light, then in
another decade we'll be wondering what we were
thinking attacking a mostly healthy system that has
served millions of Americans for decades.

Earl Pomeroy is senior counsel at the law firm Alston
& Bird and a former U.S. congressman.

Cathie G. Eitelberg is a senior vice president and
national public sector market director for the Segal
Co., a benefits, compensation and HR consulting firm.

This work is the opinion of the columnists and in no
way reflects the opinion of ABC News.