Defined-benefit pension systems are essentially promises. The government promises a specific benefit to beneficiaries when they retire. You would think that these plan participants would want their pension system to be fully funded (that it would have enough money to cover the anticipated future benefits). Why then are public pensions so often underfunded? This occurs even when pension plan participants serve on the governing boards. This suggests that plan managers and beneficiaries want to keep the plans underfunded. But why?
In a recent article in the journal Perspectives on Politics, Sarah Anzia and Terry Moe examine whether pension plans that have pension beneficiaries serving on the board are more likely to underfund their pension systems. In the paper, they explain the logic behind underfunded pensions:
Another basic feature of pension politics is that public workers and their unions have incentives to support the chronic underfunding of their own pensions. Due to state statutes, constitutions, and judicial decisions, pensions promised by state politicians are backed by strong legal protections almost everywhere; and public workers thus know they will eventually get what they are promised even if their pension plans are currently underfunded. Indeed, because full funding on a regular schedule would be tremendously costly for state (and local) budgets— crowding out other services, forcing higher taxes, making the true costs of pensions painfully transparent to citizens —public workers and their unions have incentives to prefer that their pension plans be underfunded. Underfunding enables the fiscal illusion that pension benefits are much less expensive than they really are. If public workers and their unions want increasingly generous benefits in future years, they need to convince the public that these benefits are not costly to provide. At the same time, underfunding keeps employee contributions to their own pension funds at low levels; and by keeping contributions by their employers down, they are freeing up public money for other government services, keeping public workers employed—and providing funds for their own salaries and raises.
Each of Missouri’s three teacher pension systems (Kansas City, St. Louis, and Public School & Education Employee Retirement Systems of Missouri (PSRS)) have board members who are also members of the pension system. In St. Louis, the system is currently funded at 78.1%, the lowest funded ratio since 1992. Kansas City’s funded ratio is just 66.2%. PSRS, the system which covers teachers throughout the rest of the state, has the highest-funded ratio, 84.4%. These figures, of course, rely on the pension plan’s rosy assumptions. More conservative (and arguably more realistic) estimates put the funded ratios for each of the plans below 60%.
Overall, support among teachers for Missouri’s teacher pension systems is high. But would teachers continue to support the pension plan if they had to increase their contributions to fully fund their plan?
