NCPA - National Center for Policy Analysis


April 16, 2010

Pension and retirement plans all over America have lost value.  Plans covering public school teachers, by their own admission, are underfunded by $332 billion.  However, the plans' real funding gap is far worse than their financial statements show, at nearly a trillion dollars -- and taxpayers will bear the burden of covering their shortfall, says Josh Barro, the Walter B. Wriston Fellow at the Manhattan Institute. 

The story of how this happened is familiar, say Barro: 

  • States expanded their promises to retirees when times were good.
  • Then, the economy tanked, pension assets fell in value and states skirted their obligations to deposit cash in pension funds -- all causing a funding gap.
  • But because benefits are contractually guaranteed, the obligation to cover any funding shortfall lies with taxpayers. 

Actuaries are telling states and localities to cough up far higher payments out of current budgets to shore up the plans.  In the education sphere these obligations are putting new pressure on local taxes and competing with funding for classroom instruction.  Unfortunately, an often overlooked aspect of the pension gap story makes matters even worse, says Barro: 

  • Governments use accounting methods that have consistently understated pension funding gaps in both good times and bad.
  • Examined on a more realistic basis, the true gap in teacher pensions is nearly three times the official amount -- and the taxpayers who will have to close it are in for three times the pain.
  • By applying private sector-style accounting and marking asset values to market, all the major teacher pension plans are underfunded, and the aggregate funding gap is $933 billion.
  • The unfunded teacher liability of $933 billion represents about 38 percent more debt on top of all outstanding state and local bonds. 

Given these facts, states must account honestly for their debts and take steps to make sure this never happens again.  Governments must move away from the defined benefit model and shift employees to defined contribution retirement options like 401(k) and 403(b) plans.  Because these plans do not guarantee specific payouts in retirement, employers cannot be on the hook for future benefit gaps, says Barro. 

Source: Josh Barro, "The Teacher Pension Nightmare," Forbes, April 14, 2010. 

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