Have you ever heard that policymakers want to close participation in a pension plan to all new hires? How about cutting benefits and increasing employee contributions, or converting defined-benefit pensions into do-it-yourself defined-contribution plans?
In the last decade or so, state and local policymakers have been doing exactly these things. In essence, they have been slowly dismantling public pensions. Why? Because, they argue, pension plans are underfunded and cannot be sustained. They also argue that taxpayers cannot afford public pensions. These are misguided arguments and actions. Ability to pay depends on whether an entity can meet its cash flow needs and whether the total assets of the entity – the public employer – are a reasonable fraction of its total liabilities.1
We have addressed the issue of whether taxpayers can afford public pensions in our earlier research,2 which shows that public pensions impose little or no burden on taxpayers. If anything, we have demonstrated that public pensions are revenue-neutral or revenue-positive. In this study, we will focus on whether the ability of public pension plans to meet their benefit obligations has anything to do with their current underfunded status.
New research shows that funding status has little correlation with a pension fund’s ability to pay the promised benefits. Building on Tom Sgouros’s recent work,3 John Mctighe et al.4 argue that full funding of public pensions is not only a misguided goal but also waste of taxpayer money. As long as annual contributions and investment income exceed benefit payments, pension funds can continue to operate in perpetuity regardless of their funding status. Tom Sgouros, of Brown University, demonstrates this through a visual simulation.5