Most public pension plans are significantly underfunded

From Andrew G. Biggs of AEI.

"The National Association of State Retirement Administrators – a group that works on behalf of state and local government pension plans – released a study concluding that most states are doing a good job at funding their pensions. As reported in Pensions & Investments, NASRA research director Keith Brainard states: “There is a perception that many plans and states have failed, when in fact it’s only a handful of states. Most states have made a reasonably good effort.” NASRA defines a good-faith effort to fund the plan as paying 95% or more of the Annual Required Contribution. According to NASRA, half of all plans received at least 95%.

Excuse me for thinking that NASRA is setting the bar a bit too low. We’re four years on from the end of the recession. Most public pension plans are significantly underfunded. Now is the time when all of them should be making full contributions – or more – to catch up after years of sub-par contributions and sub-par investment returns. The fact that the most NASRA can say is that a bare majority of plans are paying most of their annual contributions shows how sketchy the funding environment is.

In fact, data from the Public Plans Database shows that only 41% of public plans made their full “required” contribution in 2013, the lowest figure since the Database began in 2001. The reason is obvious: annual required pension contributions have skyrocketed in recent years, from about 7% of payroll in 2001, to 13% in 2009, to 18% of payroll in 2013. Public pensions use accounting techniques that push costs off into the future, but the future is now here. And now most plans seemingly can’t afford to pay. It might be, as NASRA says, a reasonably good effort, but it’s not a reasonably good result.


To reiterate, Brainard states that “there is a perception that many plans and states have failed” to make their payments. In reality, it’s most plans that have failed to be fully funded, and it’s seeming to be a problem that’s getting worse. Public funds have benefited from strong investment returns in recent years, so maybe the market will bail them out. They’re seemingly counting on that. But I wouldn’t."