Public employee pensions have been under fire from the right for decades, and that war intensified with the onset of the Great Recession. The sharp drop in the stock market brought losses in asset values of as much as a third for some funds. This issue’s cover story, by Daniel C. Vock and Liz Farmer, is about David Bronner, head of the Retirement Systems of Alabama. Bronner, who has run the state’s pensions for more than four decades, comes across as supremely confident in his ability to continue to fend off critics and run his pension system as he sees fit. But I think that he, and other defenders of governments’ traditional defined-benefit pensions, are misreading the situation.
The main threat to public-sector pensions is the decline of private-sector pensions. This is because as demographic changes and market trends combine to force public pension plans to turn to the taxpayers for support, those taxpayers are going to be less willing to kick in more money when they themselves enjoy no such benefit. While 84 percent of state and local workers have access to a defined-benefit pension plan, the percentage for private-sector workers has declined from 42 percent in 1990 to only 18 percent.
This has happened as public pensions’ ratio of active employees to beneficiaries, which stood at more than 7 to 1 in the mid-1950s, has declined to less than 2 to 1. That has made the funds more dependent on investment returns, but the outlook for those isn’t good either.
Since last summer, the stock market has been extremely volatile, which means that when pension plans close out this fiscal year on June 30, they will have had their second straight year of meager investment returns. As Farmer recently reported on Governing.com, Moody’s Investors Service warns that “the two-year hit will effectively wipe out the funding progress that many plans made in 2013 and 2014.”
In one of the best analyses of the public pension issue that I have seen, Donald J. Boyd and Peter J. Kiernan observed: “U.S. society long ago adopted a fundamental value that public workers are entitled to a reliable measure of retirement security in exchange for their service. That societal value is considered a core promise that governments are obliged to meet.”
What David Bronner and folks like him need to know is that over the long run the only way public pensions are going to continue is if that “reliable measure of retirement security” is extended to all workers, public and private.