Are Texas’ public pension plans built to last? Or are the challenges too great to overcome?
Questions like these are haunting a lot of public employees these days after the release of a troubling new report examining the health of Texas’ state and local retirement systems.
The report was compiled by the Pension Review Board, the agency charged with overseeing Texas’ state and local retirement systems.
The eyebrow-raising report in the agency’s June 2015 meeting packet, depicts a slew of systems that don’t have enough money on hand to keep all of the pension promises made to future retirees — at least not without massive tax increases or some other painful course correction.
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In all, unfunded pension liabilities, or the gap between what’s been promised to beneficiaries and what’s actually on hand to provide those benefits, have grown to $57.5 billion as of June 2015. That’s a staggering $42,073 owed per active member.
In the last six months, unfunded liabilities for all state and local retirement systems have grown by nearly $500 million, or about $40 million every month. In the last year or so, they’ve skyrocketed by more than $4.3 billion, or more than $360 million per month.
The swell in pension obligations isn’t the only indicator flashing red in the report, either.
The funded ratio, or the measure of current assets as a share of liabilities, for all systems was shown to be 80.5 percent.
That’s barely above the minimum 80 percent threshold that signifies a fiscally sound system, and a far cry from the preferred 100 percent threshold that actually indicates these plans can fully fund their retiree obligations.
And while other problems are highlighted in the PRB’s report, the overall gist is this: Texas’ state and local retirement systems are in rough shape, and things are getting rougher.
Most, if not all, of the plans evaluated by the PRB are set up as defined benefit (DB) systems, a type of pension plan that’s notorious for being unsustainable because it guarantees beneficiaries a lifetime of monthly benefits irrespective of the health of the retirement system.
These wildly unworkable systems were abandoned long ago by most private sector employers because they don’t make financial sense.
Defined-benefit pension plans run contrary to sound budgeting principles that stipulate that taxpayer-funded programs should be predictable, viable and not reliant upon gimmicks or market conditions to make sense.
Further, these plans are more akin to an entitlement program that creates short- and long-term costs that are hard to predict and even harder to manage.
It’s this type of entitlement spending that will, inevitably, mushroom government spending as officials try to both maintain the status quo and provide for a broken system. But at some point, the status quo becomes untenable.
Making sure that Texas’ public employees have retirement security means that we have to re-examine the way that we offer pension benefits.
Instead of shuffling every public employee into a broken defined-benefit system, it’s time that we transitioned our new employees into defined-contribution plans, which are similar to 401(k) plans and allow participants to contribute to individual investment accounts that are both portable and sustainable over the long term.
In doing so, officials can ensure peace of mind for both the workforce and the taxpayers who support them.
James Quintero is the director of the Center for Local Governance at the Texas Public Policy Foundation in Austin. firstname.lastname@example.org