By Frank Keegan Watchdog.org
Actuaries deal with political reality of pension questions
WASHINGTON, D.C. – One actuary at the Public Employee Retirement Systems Workshop on Wednesday put the question in plain language:
“What do you say when a taxpayer asks, ‘You’re telling me I took a hit on my 401(k) and get no health benefits, and you’re going to raise my property taxes?’”
Larry Johansen, who joined the New Hampshire Retirement System last year as investment director of the $5 billion trust fund, said, “It’s not the first time I’ve heard that,” to a murmur of agreement through the audience of about 50.
Enrolled Actuaries gathered here for their 36th annual meeting under the lengthening shadow of guaranteed pension promises states and municipalities made to workers without setting aside money to pay for them.
Losses of 20 percent to 30 percent in the recession exposed and increased the unfunded liabilities. Actuaries are not responsible for investing pension funds, but do the calculations used to guide how much money the funds must get from taxpayers to pay future pension benefits.
If enough money is not available in pension funds, taxpayers are expected to make up the difference.
Right now, pension funds are $700 billion to $3 trillion short, depending on how actuaries and accountants calculate. States and municipalities have deficits from overspending and revenue that dropped to 2007 levels during the recession.
Most states have to write pension checks before they pay any other bills, including earnings of current employees.
Johansen said New Hampshire’s pensions are 58.5 percent funded using standard assumptions that deem any plan less than 80 percent funded in danger of not being able to pay benefits.
How to make up the difference?
“Constituents are telling the legislators they can’t pay it,” Johansen said.
William “Flick” Fornia of Pension Trustee Advisors, who moderated the discussion with Johansen, said the problem is compounded by public officials who don’t listen to actuaries generally advising them to make bigger contributions every year and invest more conservatively.
“In some places our numbers are gospel; others they just nod and say, ‘that’s interesting,’” he said.
The result is an ongoing political controversy as state and local governments face cutting expenses and raising taxes on residents battered by the recession.
Johansen put “Wisconsin Implications” on a board listing major issues as audience members called out what they wanted to discuss.
One said, “I have a large public pension that wants to do what Wisconsin does,” which is have public workers share in some of the risk if pension investments fall.
Another audience member said, “Why it’s a hot topic in Wisconsin is a real puzzle. On a market value basis, they’re at 96, 97 percent. You can design a plan that is very stable and still get in political trouble.”
Gov. Scott Walker is pushing pension changes one audience member referred to as “draconian.”
Fornia said, “The more responsible systems better funded in the first place tend to bite the bullet when they have to.”
One person commented, “Some politicians have it in their minds” that public defined benefit pensions, guaranteed by taxpayers no matter how investments perform or whether required contributions are made, should be replaced with defined contribution plans similar to those that displaced pensions for most private sector workers. In those plans employees, not taxpayers, take the risk.
Fornia said he talked recently with an American Federation of State, County and Municipal Employees union official about pension reforms. “He had a map. It is in the union states. His take is it’s a union busting move.”
Another person said “a lot of this, if we could dig down and see who’s pushing DC (defined contribution), we’d find the names of Fidelity and Vanguard” because investment firms would get the trillions of dollars now going into public defined benefit funds that employ actuaries.
An audience member asked, “In Michigan teachers went DC. How’s that working?”
Another answered, “They did it about 15 years ago. Interestingly, the governor who pushed it chose to stay in the DB (defined benefit) plan. So did the treasurer, as did the House member who sponsored the legislation.”
Johansen asked the crowd: “So how do you deal with it in the public space?”
Audience members responded with suggestions ranging from explaining to taxpayers what caused the underfunding, to “sharing pain as well as gain,” to ending abuses such as salary spiking and double dipping that can throw off actuarial calculations and “create headlines,” to implementing variable defined benefit plans.
One thing they agreed on as time ran out is “when employers hire one (an adversarial actuary) just to move the needle in their direction,” for example to reduce annual contributions, pensions end up in trouble.
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