Unfunded Pension Liabilities: Unaccountable and Unaffordable
A while back a colleague at UMSL approached me in the hallway. In a joking manner she asked, “Hey, why do you want to take away my pension?” A former teacher, she had heard that was my nefarious plan. We had a great conversation about unfunded liabilities and all things pension. Last week she followed up with a question. She didn’t understand how the pension system could be unfunded. When she was a teacher, she and the district each contributed to the account. She was under the impression that she could only get that money plus interest in retirement. She was greatly mistaken. In a defined-benefit pension system, retirees can receive much more in benefits than they ever contribute to the system. Indeed, benefits are essentially unlimited (for the lifetime of the retired teacher).
You have to understand this aspect of defined-benefit pension systems when you consider the recent report, “Unaccountable and Unaffordable,” produced by the American Legislative Exchange Council. They estimate that state-administered pension plans have more than $6 trillion in unfunded liabilities. That is the difference between the amount we’ve promised workers and how much we have in the retirement accounts to pay for those promises. This figure is up $433 billion since 2016. (These figures use a risk-free discount rate.)
Missouri ranks 31st in total unfunded liabilities with more than $107 billion across the state’s pension plans. This translates to $17,642 per capita. That is, each Missourian would have to pay more than $17,000 to meet the obligations we’ve already promised. Unfortunately, these liabilities look like they will keep growing.
I don’t want to take away anything that we’ve promised to a public-sector worker, but we need to realize two things. First, pension benefits are not simply a function of how much workers contribute. Second, we must do something about these mounting unfunded liabilities. Either employees and employers must contribute more (which is asking a lot when they already contribute the equivalent of 29 percent of a teacher’s salary), we must hold down benefits, or we must move to a different system. If we don’t, these unfunded liabilities will eventually wreck Missouri’s finances.
You can check out the full report here.