By Frank Keegan | State Budget Solutions
Here’s a math quiz, America: When does 80 percent of something equal 100 percent?
Answer: Never, except in the fantasy world of public pension accounting.
The American Academy of Actuaries on Tuesday sent a letter to U.S. Sen. Orrin Hatch, R-Utah, puncturing that fantasy in a committee report he released six months ago.
That report repeated the constantly propagated lie that “A funding ratio of pension assets to liabilities of 80 percent is generally considered the indicator of a sound government pension plan.”
Hatch’s 14-page Committee on Finance report — “State and Local Government Defined Benefit Pension Plans: The Pension Debt Crisis That Threatens America” — accurately cited multiple published studies and statistics in asserting:
“This crushing debt load is ravaging state and local government budgets, and there are few options available to them for addressing this crisis — cuts in services, reductions in benefits, higher taxes, or some combination of the three.”
It also accurately quoted a 1979 Government Accountability Office study that “warned Congress that poorly funded public pension plans could lead to a ‘fiscal disaster and possible loss of employees’ earned benefits.’”
GAO stated in no uncertain terms: “To protect the pension benefits earned by public employees and to avert fiscal disaster, state and local governments need to fund the normal or current cost of their pension plans on an annual basis and amortize the plans’ unfunded liabilities … .
“Congress should closely monitor actions taken by state and local governments to improve the funding of their pension plans to determine whether and at what point congressional action may be necessary in the national interest to prevent fiscal disaster and to protect the rights of employees and their dependents.”
Nobody listened 33 years ago. Nobody is listening now.
Instead, state and local politicians universally used — and are still using — accounting gimmicks to loot public pension plans by shorting contributions, snatching high investment returns in good years, using investments as patronage and pushing government costs onto future generations.
Actuaries call that “moral hazard.”
One of the worst accounting gimmicks is setting a delusional number for long-term return on investment, allowing politicians to short contributions, coupled with the outright lie that 80 percent funded is somehow “fully funded.”
Of course, pension actuaries who make their living doing the mind-boggling detailed calculations, favor continuing defined benefit plans that guarantee benefits but stick taxpayers with any shortfall.
But they want to do those calculations right, based on reality and free of political pressure to rig assumptions.
In its Issue Brief, “The 80% Pension Funding Standard Myth,” the Pension Committee states: “Frequent unchallenged references to 80% funding as a healthy level threaten to create a mythic standard.”
The committee says in no uncertain terms: “Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time.”
So what do the people getting rich off public pension plans do? Lower the “adequate” funding standard to 70 percent.
The National Conference on Public Employee Retirement Systems issued a “study” last month, claiming public pensions are “solidly” funded based on rigged assumptions that show them above 70 percent.
First the 80 percent funding considered a crisis trigger point for private plans became “healthy” for public plans. Now the people who propagated that lie want to make 70 percent “adequate” and “solid.”
What this proves is the inexorable slide of municipal and state pensions toward a fiscal event horizon of perpetual debt.
It will inflict decades of severe service cuts and huge tax increases on citizens who already are devastated by lost jobs, pay reductions, stolen pensions and 401(k) plans, reduced benefits, crashed housing values, and blighted economic futures.
Even though the American Academy of Actuaries Pension Committee defends a theory of defined benefit pension plans as it obliterates the 80 percent myth, the report does not mention one actuarial factor overriding all others: moral hazard.
The big myth of defined benefit pension theory always flounders when it collides with reality.
Frank Keegan is editor of Statebudgetsolutions.org a project of sunshinereview.org. The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability.