Pension Promises Without Funding Are Mere Dreams

To paraphrase a recent Forbes article, poorly-funded defined benefit pension plans are a poor substitute for individual account retirement savings plans.¹

Recently, I posted an item titled Mind the (Wealth) Gap to once more challenge the oft-repeated claim that 401(k) plans are inadequate when compared to defined benefit pension plans (DB pensions).²

I mentioned that many DB pensions are underfunded. For example, the Massachusetts State Employees Retirement System (MSERS), as of the Jan. 1, 2018 valuation, is 64.9% funded, with more than $26 billion in assets and more than $14 billion in unfunded liabilities.³ This specific DB pension was adopted in 1911 and the benefit promises are not scheduled to be fully funded for another 20+ years in 2040.

Three times that week, I was reminded of the funding deficiencies in many DB pensions:

• First, when the House passed and the Senate reintroduced the Butch Lewis Act authorizing taxpayer-backed loans to fund multiemployer pension funding deficiencies,⁴ 
• Second, recent studies that suggest that public pension plans use “rosy assumptions” to overstate funding and understate future taxpayer burdens to fund generous benefit promises,⁵ and
• Third, I was preparing for a conference presentation; at the same conference last year, I highlighted the specific value of “funding” individual account retirement savings plan commitments.⁶ 

Add to those developments the funding status of Social Security, our taxpayer-funded “DB Pension.”⁷

Again, pension promises without funding are mere dreams.⁸ 

¹C. Weller, How The Decline Of Pensions Furthered The Racial Wealth Gap, Forbes, 7/24/19, Accessed 7/26/19 at: https://www.forbes.com/sites/christianweller/2019/07/24/how-the-decline-...
²J. Towarnicky, Mind the (Wealth) Gap, 7/26/19, Accessed 7/27/19 at: https://www.psca.org/blog_jack_2019_43
³MSERS at a glance, Accessed 7/27/19 at: https://www.mass.gov/service-details/msers-at-a-glance See also: Boston College Center for Retirement Research, State and Local Pension Plans. “A key element in the projected pension costs for SERS … will be (the) system’s ability to stick to their funding schedule. Currently, (the system has) in place a 2040 target date for full funding.” Accessed 7/27/19 at: https://crr.bc.edu/special-projects/state-local-pension-plans/
⁴J. Brufke, House passes legislation aimed at stabilizing multiemployer pension plans, The Hill, 7/24/19, Accessed 7/27/19 at: https://thehill.com/homenews/house/454644-house-passes-legislation-aimed... See also: J. Towarnicky, I’m Dreaming of a … Well Funded Pension, 12/6/18, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_55
⁵S. Jakab, Public Pensions Are Stuck in the Clouds, WSJ, 7/27/19, Accessed 7/27/19 at: https://www.wsj.com/articles/americas-public-pensions-are-stuck-in-the-c... See also: Boston College Center for Retirement Research, State and Local Pension Plans, Accessed 7/27/19 at: https://crr.bc.edu/special-projects/state-local-pension-plans/
⁶J. Towarnicky, Retirement in America - Individual Account Retirement Savings Plans ARE Good Enough! 7/5/18, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_33 See also: DC Plans: Can Everybody Win? 10/20/17, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2017_11
⁷The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, 4/25/19, Accessed 7/27/19 at: https://www.ssa.gov/OACT/TR/2019/tr2019.pdf
⁸J. Towarnicky, Make Retirement Plans Great Again? 12/11/18, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_56