Public Pensions Aren’t Causing State And Local Budget Gaps—The Pandemic Is

In the drama over the federal Covid-19 relief legislation, Republicans led by Senate Majority Leader Mitch McConnell (R-KY) rejected state and local budget aid, claiming it would be used to bailout badly managed states, including their public employee pension systems.  Although Democrats offered a bill preventing that use of federal funds, McConnell still refused to compromise.  Why are Republicans so opposed to public pension funding?

To gain insight on this, I spoke with Forbes contributor Teresa Ghilarducci, one of the nation’s top economists on pensions and retirement policy. (Full disclosure—she also is my wife.)  She thinks it might be popular to oppose public pensions because of what she calls “pension envy”—as private sector workers have lost pensions, public employees are now the most likely to have them.  91% of state and local public sector workers have access to pension plans compared with 67% of full time private sector workers.  

Private sector workers are victims of the nation’s failed pension experiment, the shift to defined contribution 401(k) plans that started in the 1980s.  As the baby boomers approach retirement, because most don’t have enough money to maintain their living standards.  Many of the 24 million workers aged 55-64 will face declining living standards or poverty in just 10 years, with  the median account balance of workers approaching retirement a paltry $15,000.  Economists at Boston College have found that 50 percent of households are “at risk” of not having to maintain their living standards in retirement.

In April, McConnell said he would refuse to fund states to help solve “problems that they created for themselves over the years with their pension programs.”  This is part of the Republican narrative that that financial mismanagement generally, and pension problems specifically, are a blue state and Democratic issue.  But it’s a bipartisan problem.  In fact, McConnell’s home state of Kentucky is one of the worst funded state plans in the nation. 

Republican and Democratic governors alike govern states with well-funded pension plans.  Democrats in New York, North Carolina, and Wisconsin, and Republicans in Tennessee and South Dakota all have well-funded plans.  

Both Democrats and Republicans at one time or another have underfunded the pension promises they made to public employees. Those promises were made to get taxpayers loyal public employees without having to pay much up front in salaries. Good pension plans kept public employees in their jobs, helping reduce costly turnover.

About 6,000 public sector retirement systems exist in the U.S —  299 state-administered plans and 5,977 locally-administered plans, many of them very small. And the most important variable determining whether pensions are adequately funded is how economically healthy the state. After all, the size of a mortgage doesn’t determine household financial health—it’s the ratio of the mortgage payments to total income. In the same way, the fiscal health of the pension sponsor determines whether the costs of funding the pension plan creates fiscal stress for the state.

And there isn’t much sign the stress is severe. Between 2001 and 2019 the required contribution to all-state and local plans as a percent of all state and teachers plans rose from about 1 percent of revenues to 3.8% of revenue.

The estimated total pension fund shortfall is less than 0.2 percent of projected gross state product over the next 30 years for most states, and less than 0.5 percent in states with the largest shortfalls.  State and local pension problems have been seriously misrepresented in public debates.  And since blue states have higher economic growth rates than red states they have a stronger ability to sustain its pension debt.

Attacks on public employee pensions also are seen as part of a larger attack on public employee unions, who tend to be politically Democratic.  Teachers and other public employees have been targeted by conservative funders and activistsfor years, and undercutting their pensions can be seen as another battle front. 

McConnell successfully blocked any significant relief to states and cities in the latest bill, and there’s not much hope that incoming President Joe Biden will be able to get more aid absent a Democratic takeover of the Senate.  But states and cities are suffering from the pandemic recession’s impact on their economies and budgets, not because of poor management.  And instead of attacking public employee pensions, we should be finding ways to get decent retirement coverage for all Americans.