TEACHER PENSIONS ARE A TICKING TIME BOMB
April 29, 2010
What could be worse news than public school teacher pensions across the country reporting an unfunded liability of over $330 billion, asks Josh Barro, the Walter B. Wriston Fellow at the Manhattan Institute? How about the fact that these reports understate the size of the liability by a factor of three?
Recently, the Manhattan Institute and the Foundation for Educational Choice released a report that scrutinizes the financial statements of the 59 pension plans covering most teachers in the United States. The authors applied private sector-style standards to their estimates of future liabilities and adjusted their asset values to fully reflect the last two years' drop in stock prices.
The results aren't pretty, says Barro:
- Applying more realistic standards, these plans are $933 billion short of the assets needed to cover their promises to retirees, or more than $18,600 per public school pupil.
- That figure represents a debt that governments owe to active and retired teachers -- and paying it off will mean a combination of higher taxes and lower education spending in the classroom.
How did this gap grow so large? According to Barro:
- Public pension plans made risky bets on equity investments and assumed that fast gains in the stock market would enable them to cheaply provide generous pensions to teachers.
- When the stock market performed strongly (such as during the tech bubble of the late 1990s) this strategy appeared to be working, and then some.
- Many state legislatures chose to sweeten retiree benefits because their pension plans appeared to be overfunded.
Then, the pendulum swung the other way, and the stock market reported negative returns over the last decade. Employees are still owed generous benefits, but pension funds are in much sorrier shape -- and they're telling state and local governments to cough up lots of cash to fix the gap, says Barro.
Corporate America has recognized that defined benefit pensions are unaffordable and unsustainable. For the good of taxpayers across America, it's time for governments to make the same realization, says Barro.
Source: Josh Barro, "Teacher pensions are a ticking time bomb," Washington Examiner, April 28, 2010.
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