Susan Pendergrass speaks with Andrew G. Biggs, senior fellow at the American Enterprise Institute, about the Social Security trustees’ latest report and what it means for the program’s future. They discuss the projected 2032 insolvency of the retirement trust fund, why the trustees’ birth rate assumptions may be too optimistic, the proposed Moreno-Warren plan to eliminate the payroll tax ceiling, the Cassidy-Kaine plan, and why pension experts oppose it, what would actually happen if the trust fund ran out, and more.

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Episode Transcript

Susan Pendergrass (00:00):
I feel fortunate to have grabbed some of your time. Andrew Biggs from the American Enterprise Institute, I appreciate you coming on to talk to us. Social security has been nothing but in the news recently, and you know more than anyone else. So thank you for taking the time.

Andrew Biggs (00:14):
That’s why I’m so cheerful. The more you know about Social Security, the happier you are. But thanks for having me, Susan. It has been busy. I’m really happy to be with you today.

Susan Pendergrass (00:16):
I’m in my sixties. I see something about Social Security running out of money and I pay attention. So just to bring us all up to speed: in the last week, there was a news flash that Social Security is going to run out of money sooner. What does it really mean?

Andrew Biggs (00:39):
Every year the Social Security trustees, which is mostly members of the cabinet, the Secretary of the Treasury, the Social Security Commissioner, and so on, come out with a report projecting the program’s financial health, both in the short term and the long term. That happens every year, and it’s been getting worse every year. In this year’s report, they projected that the retirement trust fund will go insolvent, or run out of money, in 2032. They also projected a significantly larger long-term funding gap in the years thereafter, and this is worth explaining.

When the trust fund runs out, it doesn’t mean there’s zero money to pay benefits. As long as we’re paying a trillion dollars a year in payroll taxes, there will be money to pay benefits. But when the trust fund runs out, it means benefits will be cut, and their projection is somewhere around 22%. The size of that long-term funding gap dictates how big the cuts are going to be in the years thereafter. The trustees lowered their projections for birth rates, and they found that the One Big Beautiful Bill has worsened Social Security’s finances. A variety of things made this long-term funding gap worse. It’s really hard to paint a happy picture. The trust fund can be running out in about six years, and the funding gap and the benefit cuts in years thereafter are going to be larger. It’s a sobering picture.

Susan Pendergrass (02:16):
I’m not trying to pile on, but I think I saw that they extended the time when they expect birth rates to bounce back. Is that true? Because I have not seen anything anywhere, and I’ve spoken to some demographers, to suggest birth rates are ever going to bounce back.

Andrew Biggs (02:35):
Here’s the interesting thing. If you look at the Congressional Budget Office or the US Census Bureau, right now the fertility rate is about 1.6 children per woman on average, and both the CBO and the Census project that’s going to remain pretty much steady, declining a little bit over coming decades. Social Security had a very different picture. As of last year, they thought the birth rate, which is 1.6 now, was going to immediately start rising and go back up to 1.9 children per woman in the next several decades. That makes Social Security’s finances better. More kids being born means more people paying into the system. What they did in this year’s report is moderate a bit on fertility. They said, okay, it’s not going to rise back to 1.9, it’ll rise back to 1.75. So they are still over-optimistic. I’ve talked to some demographers and economists who’ve really focused on the birth rate, and they described the trustees’ assumptions as, quote, fanciful, meaning they just weren’t plausible. Now they’re somewhat more plausible, but they still tend

Susan Pendergrass (03:32):
Okay.

Andrew Biggs (03:48):
to be more optimistic than other agencies. And to me, frankly, this is a concern. You really want the people who are the scorekeepers, the umpires, to be playing it as straight as they possibly can. We know that these guesses are going to be wrong because this stuff is impossible to predict with certainty, but most demographers think the best guess is we’ll stay around 1.6 going forward. You’ve seen a decline, and a good predictor of birth rates is religiosity, the level of religious belief in a country. The US has typically been much more religious than Western Europe, and that’s played into fertility. There has been a big decline in religious belief, particularly among younger Americans, along with all the other pessimism you see among younger people. When people are pessimistic, they tend not to have a lot of kids. So the best guess is we’re going to stay about where we are.

I wrote something the other day saying the bad news in this trustees report is even worse than last year’s, but it could have been even worse. They project a long-term funding gap above 4.4 percent of payroll. What that means is if you took the 12.4% payroll tax today and raised it immediately and permanently by 4.4 percentage points, from 12.4 to 16.8, that would in theory keep the trust fund solvent for 75 years. But a better guess would be a funding gap of around 4.8 to 5 percent. This is real money. For years, people on the left have said, well, okay, we know Social Security has a solvency problem, but it’s a manageable issue. They were saying that when the funding gap was 2% of payroll. Now you’re looking at four to five percent. That’s a lot of money, at a time when a lot of other things are making claims on the budget. We have some difficult choices to make and we really have to start thinking hard about this.

Susan Pendergrass (06:09):
Okay, so what about this idea that’s been floated in the last week of getting rid of the payroll cap? First of all, explain the payroll cap, and then this idea of getting rid of it.

Andrew Biggs (06:17):
Sure. Social Security has a 12.4% payroll tax, half paid by you and half paid by your employer. That applies only to wages up to $184,500. That’s called the payroll tax ceiling, or the tax max. That dollar figure goes up every year, but this year it’s $184,000. You only pay taxes on those wages, and you also earn benefits only on those wages. People say, well, Bill Gates doesn’t pay more taxes than that. But he doesn’t earn any benefits either. So you’re capping both the taxes and the benefits.

To fast forward a little bit: there’s an op-ed in the Washington Post this week from Senator Bernie Moreno, a Republican from Ohio, and Elizabeth Warren, a Democrat from Massachusetts. They say it’s just common sense to eliminate that cap and tax all earnings for Social Security. The interesting thing is how uncommon that would actually be. Our payroll tax ceiling is $184,000. Almost every other country has a ceiling on their payroll taxes for their pension system, and in almost every other country that ceiling is lower. In Canada, you only pay taxes and earn benefits up to around $60,000 in earnings. In the UK it’s about $70,000. In Germany it’s about $70,000. We are already an outlier for how high up the income ladder we tax people. To eliminate the cap entirely is a big deal. It’s effectively a 12 percentage point increase in the top marginal tax rate. I pulled an example of somebody living in New York City. A high-income person already pays 37% in federal income taxes, plus regular Medicare taxes, the additional Medicare tax, state taxes, and city taxes. If you add another 12 percentage points on top of that, their marginal tax rate would be in the mid-60s. And that’s before we’ve fixed Medicare or done anything else. The federal budget is still broke, and you’ve taxed these people as high as you possibly can. So these things that look like common sense, why don’t we just tax everybody,

Susan Pendergrass (08:37):
Right, right.

Andrew Biggs (08:46):
look, there are reasons for that.

Susan Pendergrass (08:49):
And were they suggesting that if I make $300,000 and I pay my 6.2 percent, totaling 12.4 with my employer, on my entire salary, that my Social Security benefit one day would be higher? Are they talking about capping the benefit or just getting rid of the cap on contributions?

Andrew Biggs (09:06):
They haven’t been very specific. They say Social Security would continue to be an earned benefit, which kind of implies you would continue to earn benefits on the additional taxes you would pay. Let’s say if we uncap the payroll tax and base your taxes on your total earnings, you’d also base your benefits on your total earnings. What you get then is, okay, you’re getting all this money from people in the short term, but you have to pay them higher benefits in the long term. That offsets some of the savings. And this morning I was running some numbers looking back to the 1970s. We had a huge run-up in benefit levels from Social Security in the 1970s. The benefit formula we have today is not the one FDR invented. It really happened in the 1970s, where they jacked up benefits in a really foolish way, and then to help pay for it, they increased the payroll tax ceiling. Right now you pay taxes on earnings up to $180,000. If we had just kept the tax max from 1970 and indexed it to wages, it would have been only $95,000. So they essentially doubled the wages on which you pay Social Security taxes. But what happens is they also doubled the wages on which people earn benefits. I’ve highlighted the point that if you have a high-income

Susan Pendergrass (10:38):
Mm-hmm.

Andrew Biggs (10:43):
couple retiring today, they could get almost $100,000 in total benefits, which is absurd. There’s no reason a government program should be paying anybody that amount. If you want that kind of income in retirement, you save more in your 401k. It’s better for you, better for the economy. But it was a result of this short-term step they took in the 70s. They said, hey, we raised benefits too high, let’s jack up the tax max. And they didn’t worry about the fact that in the future you’d have to pay benefits on that. Well, the future is today.

Susan Pendergrass (11:05):
Okay.

Andrew Biggs (11:13):
Now we’re broke again, we need extra money again, and these guys say, well let’s just jack up the tax max. But then you’ll pay extra benefits in the future. It becomes this chasing-your-tail kind of thing.

Susan Pendergrass (11:16):
Yeah. Yeah.

Andrew Biggs (11:25):
And the problem when you do it is there’s no country on earth paying $100,000 a year from a social insurance program, except for us. And the reason we do is these stupid historical decisions. If you’ve got this high-income couple in the US retiring today, they can get almost $100,000 from Social Security. If they lived in Canada, they’d get like $35,000. And that’s perfectly fine. Nobody’s starving to death in Canada in retirement. They just save more on their own.

Susan Pendergrass (11:35):
I’ll say.

Andrew Biggs (11:55):
The irony is that we think of ourselves as a free-market, small-government country, and our Social Security program is enormous, primarily because we’re paying benefits to people that other countries say, yeah, we don’t need to pay benefits to these guys.

Susan Pendergrass (12:11):
And yet people say, I put my money in, I get my money out.

Andrew Biggs (12:14):
Yeah, and I understand it. When I say we shouldn’t be paying $100,000 a year to a high-income couple, you get the email saying, well, I paid in. And if you paid in, you feel you have this moral claim on benefits. The problem is Social Security is still broke. We still need higher taxes or lower benefits. The idea that you’re just going to get your full benefits with the taxes you paid doesn’t work because the system can’t afford to do it. So you have to make the choice: do I want to pay higher taxes or get lower benefits? I’ve got to pick my poison. Most high-income people would prefer to get lower benefits. They care more about their taxes than their benefits. But people are still living in this dream world where this system, which is $30 trillion in the hole, is somehow going to pay them everything they’ve been promised and just screw somebody else. Everybody thinks they’re the guy who’s going to get everything and somebody else is going to get screwed.

Susan Pendergrass (13:14):
Yeah. I definitely hear people saying today, maybe I should go ahead and take it early and then I’ll get grandfathered in and my benefits won’t get lowered.

Andrew Biggs (13:26):
It probably won’t make a difference. In general, the Social Security benefit formula works based on your birth cohort, the year in which you’re born, not really the year in which you claim benefits. And people who are going to do Social Security reform understand the incentives. They don’t want to make it easy for people to game the system. So Social Security reform will probably work itself out in such a way that

Susan Pendergrass (13:42):
Right.

Andrew Biggs (14:03):
you can’t get some big advantage by claiming early. I could think of some conceivable possibilities, but I still would not encourage people to claim early.

Susan Pendergrass (14:14):
Okay, I want to talk about two more things I read in the last week. One was a letter from Tim Kaine about his idea with Senator Cassidy. What’s that idea for fixing it?

Andrew Biggs (14:24):
The interesting thing is people say Social Security reform has to be bipartisan. So we have two bipartisan ideas. We have Moreno and Elizabeth Warren, a Republican and a Democrat. They’ve got one idea, eliminating the payroll tax ceiling.

Susan Pendergrass (14:39):
Third rail.

Andrew Biggs (14:49):
Cassidy, a Republican from Louisiana, and Tim Kaine, a Democrat from Virginia, they’ve got a bipartisan plan. And guess what? Their plan is also terrible. If there’s any lesson from this, it’s that bipartisan doesn’t mean good.

Susan Pendergrass (15:00):
Bipartisanly terrible.

Andrew Biggs (15:04):
Yeah. Look, ultimately Social Security reform is going to have to be bipartisan, given the way the political system works. On the other hand, there is some lesson that if both Republicans and Democrats can agree on something, it might be a terrible idea. With Cassidy and Kaine, they are explicitly, and Cassidy said this, solving a political problem. The political problem is that neither Republicans nor Democrats want to vote for either tax increases or benefit cuts. You’d think Democrats want to raise your taxes and Republicans want to cut your benefits. The reality is they don’t want to do either of those things because they realize both are politically unpopular, which is why we’ve gone 40 years literally doing nothing. So their solution is that we don’t have to make these difficult votes. Instead, the federal government will borrow about $2 trillion, invest that money

Susan Pendergrass (16:02):
Tough.

Andrew Biggs (16:04):
in stocks and private equity, high-risk, high-return stuff. Then they claim they’re going to hold this fund for 75 years so it can build up value. In the meantime, when Social Security’s trust fund runs out in 2032, the federal government will borrow against the assumed gains on this investment fund.

Susan Pendergrass (16:06):
Right. Mm-hmm.

Andrew Biggs (16:29):
They say the borrowing will be at a lower rate because it’s the federal government. And they say after 75 years, all the gains in this investment fund will pay back all the borrowing and we’re all good. And let me count the ways there are problems with that. If you work at the state level,

Susan Pendergrass (16:45):
It’s just kicking the can.

Andrew Biggs (16:52):
state-based think tanks almost know more about this than federal people. A lot of underfunded state pension systems do things called pension obligation bonds. Their pension system is underfunded, they don’t want to raise contributions or cut benefits, so they borrow and invest in the stock market and hope it works. The pension obligation bond is the hallmark of a poorly funded, poorly run pension system. Think New Jersey, Illinois, things like that.

Susan Pendergrass (17:21):
Yeah.

Andrew Biggs (17:23):
There’s a national group of state budget officers that has come out and basically said as an institution, don’t do this. Borrowing for your pension is a bad idea. So it really is fitting for the times that the Cassidy-Kaine plan says, let’s take this worst idea from state and local government

Susan Pendergrass (17:45):
Yeah.

Andrew Biggs (17:47):
employee pensions, which has been condemned as bad practice, and put it on steroids and do that for Social Security. And what it really gets to is they just don’t understand the finances of it. And to be frank, they won’t listen. They have talked to every pension expert I know, and this Social Security world is pretty small. We all know each other on both sides. We may not agree on everything. Literally every pension expert I know says this is a terrible idea.

Susan Pendergrass (17:54):
Yeah.

Andrew Biggs (18:17):
But their political considerations are more important than policy, and that’s the problem with all of them.

Susan Pendergrass (18:24):
I mean, it feels free. They’re basically saying it’s like a timeshare. It just feels free right now. We just borrow the money. Okay, so

Andrew Biggs (18:31):
It’s been pointed out to them that if you can fund Social Security this way, you could fund the entire federal government this way and never collect any taxes. At one point Senator Cassidy was quoted in a newspaper article saying, well, yeah, sure, in theory you could. And I’m like, if something implies there’s a free money machine, maybe you need to question your assumptions.

Susan Pendergrass (18:38):
Sure. Okay.

Andrew Biggs (18:54):
I could give you a whole variety of reasons why this doesn’t work, but one macro point that’s come to me: I’ve been doing Social Security for a long time. I worked in the Bush administration in 2005 when they tried and failed to do Social Security reform. One of the problems we face today is that your elected officials understand Social Security policy much less well than they did 20 years ago. They just don’t understand how the system works. Going back to the Moreno-Warren idea of applying the payroll tax to all earnings,

Susan Pendergrass (19:22):
Yeah.

Andrew Biggs (19:37):
okay, you’re adding 12 percentage points to your top tax rate. There’s a reason Sweden and France and others don’t do this anymore. They used to have incredibly high tax rates. They don’t now. We would end up in many cases with a higher tax rate than most European countries. We have some philosophical dedication to small government and things like that. They don’t. And so if they’re not doing it,

Susan Pendergrass (19:43):
Yes. Yeah, yeah.

Andrew Biggs (20:02):
it’s because there’s a practical reason this isn’t a good idea. The same applies to wealth taxes. That’s been tried in Europe. They’re like, yeah, we’re not doing that anymore because it doesn’t work. But your average senator now

Susan Pendergrass (20:14):
It is happening around the country, the billionaire tax. What happens in 2032 if no one is either brave enough or smart enough to take this on in the next six years?

Andrew Biggs (20:17):
They’re just not aware of these policy issues, and that’s a real problem. It’s like having a guy fix your car who doesn’t know how to fix cars. 2032 is the date. If you have a recession, it might be 2031. It’s not certain, but it is certain it’s happening soon.

Susan Pendergrass (20:47):
Yeah. Okay.

Andrew Biggs (20:53):
There’s a literal reading of the law, which is that Social Security can’t pay out benefits it doesn’t have dedicated resources for. Once the trust fund runs out, the only dedicated resources are mostly the payroll tax, plus a little bit of money from income taxes levied on retirement benefits. And those were cut as part of the One Big Beautiful Bill. So if the trust fund runs out, they’d have to rely on the money they have on hand, which implies around a 22% benefit cut.

A lot of times people assume that benefit cut has to be across the board. If you did it that way, you’d throw a lot of people into poverty. I did some work a year or so ago with a lawyer in DC named Kristen Shapiro, and what we found is that the legal precedent shows the executive branch, meaning the president working through the Social Security Commissioner, would have some discretion. What we found is you could maintain full benefits for about 50% of people, the poorest 50% of seniors, and then cap benefits above that. If you cap the maximum benefit at about $24,000 per year for a single person or $48,000 for a couple, that is enough to make Social Security solid without raising taxes. So the point is simply you have some discretion.

The reality is Congress isn’t going to allow big benefit cuts, for political reasons. On the other hand, are they willing to have the size of tax increases needed, all in one go, to keep Social Security paying full benefits? I don’t think they want that either. So the reality is probably they’re going to borrow a lot of the money. And that’s where you get to the issue of how much more borrowing the financial markets will swallow. We effectively borrow from the public to repay the Social Security Trust Fund, but there’s an end to that. You say, okay, 2032, we have to do something. We have to raise taxes or cut benefits. If in 2032 the stated policy of the federal government is, well, we’re just going to keep borrowing to pay Social Security even though we have no prospect of paying it back, you wouldn’t blame some big market players for saying, yeah, I’m out, because you don’t want to lend money at low interest rates to someone who says they can’t pay it back. Then you start getting a couple of things. One is more federal borrowing squeezes out capital in the rest of the economy, and so interest rates naturally rise.

Susan Pendergrass (23:18):
Right.

Andrew Biggs (23:31):
But then there’s a second element: if you’re afraid the federal government can’t pay you back, over and above that natural increase in the interest rate, you’d apply a risk premium to treasury debt. You’d say, look, Treasury is not this rock-solid investment anymore. It’s more like a junk bond, or like borrowing from Illinois, and you make them pay a premium. That’s going to drive up

Susan Pendergrass (23:43):
US government borrowing. Yeah, yeah, yeah.

Andrew Biggs (24:01):
interest rates, and that makes it tougher not just for the federal government but for everybody. If you want to buy a car or a house, all your interest rates rise. There’s also going to be real temptation to inflate away the debt. The federal government doesn’t want to default on its debt, but

Susan Pendergrass (24:24):
Yeah, yeah.

Andrew Biggs (24:25):
historically the way you deal with this is inflation. Think about all the debt we took on during COVID, shoveling money out the door to everybody, and then we had massive inflation after it. A lot of those people who bought treasury debt didn’t get a good deal, because if you get 20% inflation on

Susan Pendergrass (24:34):
Absolutely. Yeah.

Andrew Biggs (24:47):
a treasury bond with a nominal fixed interest rate, that’s a real problem. So inflation becomes increasingly tempting. You look at this scenario and you’re like, can’t anybody here play this game? Every other country is not going bankrupt. We just have to do what they do.

Susan Pendergrass (24:51):
Yeah, yeah. So could we, if we really got our heads around it and started today or next year, incrementally raise the 12.4%, or incrementally get people used to lower benefits after a certain income or wealth level?

Andrew Biggs (25:18):
Sure. Yes. The way I think about it, there are two ways people think about it: the wrong way and my way. The wrong way is, let’s just pick from this menu of options to make Social Security solvent. We can raise the payroll tax a bit, raise the retirement age a bit, cut cost-of-living adjustments a bit, raise the tax cap a bit, and do these things until the system is solvent.

Susan Pendergrass (25:34):
Yes. Yeah.

Andrew Biggs (25:54):
That’ll get you a solvent program, but it won’t be a program that particularly works very well or is good for the economy. A more effective way is to ask, what do we want this system to do? If you talk about Social Security reform, what you hear is that it’s a social insurance program, a safety net, an anti-poverty program. Okay, it has to do that. And that part is really very cheap, because we don’t literally have that many poor seniors, their benefits aren’t very high, and it’s not a problem to maintain benefits for low-income seniors. When you ask what Social Security should do, nobody is saying we need to be paying high-income seniors $100,000 a year. There’s no public purpose for it. Nobody thought it out in advance. It was simply an unintended consequence. So if you’ve got things that are really costing a lot of money and have no public purpose, and those people can save for retirement on their own, you start scaling that back. The distinction I’m making is between policy changes simply for the purposes of keeping Social Security solvent, and policy changes for the purpose of making Social Security do what it needs to do, the real public purpose, and not doing things that serve no public purpose. My point is the things I’m talking about are things you should do whether Social Security is insolvent or not.

I’ll give you an example: Australia’s retirement system. Australia is a lot like us, not particularly more conservative or liberal, just sort of normal. Their Social Security program essentially is targeted at eliminating poverty in old age. It’s actually a better safety net than Social Security provides, but the benefits decline down to zero once you get above the poverty level. And to help people above that level save for retirement, everybody is enrolled in a 401k-type account. What that says is, if everybody’s participating in retirement plans as they should, the government’s job becomes easier. Their Social Security system costs about two percent of GDP. Ours costs about six percent. It’s a third as costly, provides a better safety net, and it comes because they’re actually thinking about what they’re doing.

Susan Pendergrass (28:18):
Mm-hmm.

Andrew Biggs (28:26):
We’re literally not thinking about what we’re doing. There’s a saying in business: the worst reason to do something is because we’re already doing it. That is literally how Social Security policymaking works. Nobody knows why our benefit formula is what it is or why the tax max is what it is. It’s all just stuff we inherited from the 1970s from people who were not in any way thinking clearly about what they were doing. It was people in the 70s trying to win elections, and we end up with the bag.

Susan Pendergrass (28:52):
Speaking of 2005, there was an attempt to offload a small portion of people’s contributions into the market, right? That failed.

Andrew Biggs (29:09):
That was the Bush proposal. I was in the White House then, kind of in a number-cruncher role, so I knew that stuff pretty well. I did a lot of events with President Bush around the country. When we came up on the 20th anniversary of Bush’s proposal in 2025, I started thinking to myself, what if his plan had passed? What would have happened? So I built a model. Back then they were saying, okay, you’re going to have some reductions in traditional Social Security benefits for middle and high-income people, and then you’re going to have a personal account where you can invest part of your existing payroll tax in stocks and bonds. The total benefit you get at retirement is a combination of those two. People were speculating. Well, we don’t know what the stock market’s going to do. But 20 years later, we’ve got some data, so let’s just see what happened. The results were that for people

Susan Pendergrass (30:01):
Now we do.

Andrew Biggs (30:07):
retiring today, low and middle-income people would have had higher total benefits by a little bit. The very highest-income people, their benefits would be down by a couple percent because the cuts to their traditional benefits would be larger than the gains from their personal account. But even they would be fine; it’s not a big deal. Going forward, it looked like people would do a little bit better with the Bush plan than with the traditional system. But here’s the important thing: the traditional system is broke. We just talked about how it goes broke in 2032, with huge deficits. The Bush proposal wouldn’t have made Social Security totally solvent, but it would have addressed half or two-thirds of the long-term funding gap. So you’d get a system that would have paid you benefits around the same as, or maybe a little bit better than, Social Security, but would be in much more solid financial shape. Today the times are different, and I don’t think personal accounts are really viable. But the point is, if they had done something back then, everything could be easier today. But members of

Congress were just too afraid. Republicans were afraid of taking the political hit. For Democrats, it was too tempting to give the political hit. They knew they had to do something, but they couldn’t swallow hard and say, look, let’s just go in on this thing together. They didn’t want to give Bush the win because by that point Iraq was going badly and they really didn’t like him. So they beat him up. But the problem is Bush served his term and is happily retired in Texas. The people who really got screwed were the ones who depend on Social Security, because we didn’t fix it. And you just hope that’s not what we do again.

Susan Pendergrass (31:42):
Yeah. Somebody not us in 2045 could be having the same conversation, right? Like, if only in 2025 or 2026 we’d gotten serious. And I do think people mix up the trust fund with the whole program. A lot of people think all of Social Security is going to be bankrupt in six years, versus the reality that we’re still taking in a trillion dollars, we just need about 22% more than what we’re taking in.

Andrew Biggs (32:14):
Yeah. If you go back 20 or 25 years, there were all these arguments about whether the trust fund is real or fair or whatever. The trust fund is essentially IOUs written from one side of the government to the other. I thought at the time the trust fund is not real in an economic sense. It doesn’t make it easier for the government to pay Social Security benefits. It is a pledge that we will pay them, but it doesn’t make it easier to pay them. But here’s the interesting thing:

Susan Pendergrass (32:25):
Right. Al Gore. The lock box.

Andrew Biggs (32:50):
if having a trust fund doesn’t make it easier to pay benefits, then not having a trust fund doesn’t make it harder. The trust fund runs out, we still have taxes coming in, we can still pay 80% of what is owed. If we retarget that, you can maintain the safety net. It’s not like you’re totally insolvent or broke. All those long debates over whether the trust fund is real get resolved because the trust fund itself is gone in six years. So that doesn’t matter very much anymore. But I do hope that, as you said, we’re not in 2045 looking back on a solution of just borrowing $500 billion a year or whatever it’s going to be. People in 2045, when the federal government is bankrupt, the dollar is dropping, and all these financial crisis things we think only happen to other countries are happening to us, they would look back and say, I wish those people were more responsible. The Social Security problem, in a sense, if we went back 25 or 30 years ago, was a manageable problem. The real issue is not the demographics or the benefit growth or whatever. The real issue is just poor stewardship of this program by Congress and respective presidents. It is absolutely a governance problem. It is not a problem of economic or demographic fundamentals. All of that can be handled.

Susan Pendergrass (34:19):
Everyone wants to be Santa Claus, right? No one wants to be the Grinch.

Andrew Biggs (34:22):
It’s very true, but leadership is about giving people bad news. Good news kind of tells itself. Bad news has to be told and people have to be convinced that this is going to hurt, but we’ve got to do it. And we just didn’t have the willingness. President Clinton in the late nineties tried to do some stuff, but he didn’t deliver much bad news because we had surpluses. President Bush was willing to tell people, okay, look, you’re not going to get every penny you’ve been promised. Beyond that, the level of leadership has been very poor.

Susan Pendergrass (35:01):
Hasn’t been good. All right, well, next year when the trustees report comes out, come back and give us more bad news.

Andrew Biggs (35:09):
Yeah, until then, things are looking up. But no, it’s something people want to be aware of, and I think that’s the key thing.

Susan Pendergrass (35:13):
Well, I think one of the more important things you said is that no one understands it. People are upset and arguing over something they don’t understand the mechanics of. I do know people who think they have an account with their name on it that their Social Security taxes went into, and they’re just going to start taking the money out.

Andrew Biggs (35:23):
I have some bad news for that. Your taxes go into Social Security and go straight out the door to pay for your grandmother’s benefits. If you want to know where your taxes are, they’re in your grandmother’s bank account. So go ask her.

Susan Pendergrass (35:45):
That’s right. That’s right. All right, thank you so much. I really appreciate the time.

Andrew Biggs (35:51):
Thank you, Susan. It’s a pleasure to be with you.

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If only someone had warned them about this years ago. Oh, that’s right . . . we did.

The topic of public-employee pension reform has long been important to Show-Me Institute writers. Back in 2013, for example, Andrew Biggs wrote Public Employee Pensions in Missouri: A Looming Crisis. The report did not specifically analyze St. Louis’s teacher pension fund, but the point about the pending crisis applied nonetheless.

When we call attention to impending problems, we are often called alarmists. I have twice had teacher groups circulate action alerts warning members not to respond to my requests for information regarding pensions. It was so bad we actually recorded a podcast telling people we were not trying to take away their pensions. The pushback we received led me to ask, “can we have meaningful dialogue on pension reform?”

So—what changed?

Now, it is the educators themselves raising the alarm. In the KSDK report, Byron Clemens, with the American Federation of Teachers in St. Louis, and his brother, state representative Doug Clemens (D-72nd District), are both quoted on the matter. They highlight how the underfunding of pension systems is harming retirees.

Unfortunately, the Clemens brothers do not call for significant pension reform. They see the symptoms of the problem, but rather than address the structural issues that got us to this point they seem to argue for policies that would only treat the symptoms.

St. Louis’s pension system is underfunded because of the program’s design. Missouri needs to explore new options, such as defined-contribution and hybrid plans, to provide retirees a safe and secure retirement.

The post Rising Concerns about St. Louis’s Teacher Pension Fund appeared first on Show-Me Institute.

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Dear Missouri teachers and all Missouri citizens:

As a Missouri public-school employee, I don’t pay into Social Security; I pay into the Public School Retirement System (PSRS) pension—to the tune of 13-15% of my salary.

The Missouri pension system for public employees REPLACES Social Security (i.e., I will never get Social Security or my spouse’s SS); that’s why the word “pension” misleads a lot of people.

We don’t get both.

Last month, a Missouri state representative from Nixa, MO, introduced a bill to change the current funding structure for teacher pensions to a defined contribution rather than a defined benefit plan, claiming that taxpayers might need to pay for any shortfalls in future years should the funds not be adequate. THIS IS NOT CORRECT.

Missouri’s PSRS has long been admired nation-wide as one of the MOST SOLVENT pension plans IN THE NATION.

We (teachers) are not the enemy; we are not the problem. Missouri’s financial problems should not be balanced on the backs of teachers who have paid into the system for their entire careers. The Missouri government set the rules. We have followed them. They have not. Now, they want to blame teachers for the State’s money woes, and steal from teachers’ retirement again!

Please call your state reps to support teacher-retirement funding and not changing it!

PLEASE.

Claim 1: “I pay into Public School Retirement System (PSRS) pension— to the tune of 13-15% of my salary.”

MOSTLY TRUE

Since 2012, Missouri teachers have paid 14.5 percent of their salary into the public school retirement system. This is matched by another 14.5 percent from the employer. It rose steeply from around 10 percent in the early 2000s in an effort to address unfunded liabilities (See Figure 3 here).

Claim 2: “The Missouri pension system for public employees REPLACES Social Security (i.e., I will never get Social Security or my spouse’s SS); that’s why the word “pension” misleads a lot of people.”

MIX OF TRUE AND FALSE

Missouri teachers do not pay into Social Security, but they may still be eligible for a benefit. According to the PSRS website, teachers “may qualify for Social Security benefits if you have 40 units (10 years) of Social Security-covered employment. You may also be eligible for benefits from Social Security through your spouse or ex-spouse (living or deceased).”

Claim 3: “Last month, a Missouri state representative from Nixa, MO, introduced a bill to change the current funding structure for teacher pensions to a defined contribution rather than a defined benefit plan…”

FALSE

House Bill 864 does not change the structure of current defined-benefit pension system for anyone in the system. In fact, it sets the current PSRS system as the default option for all incoming teachers. It would simply allow teachers the option of choosing a defined-contribution (DC) plan if they want to. Teachers who opt into the DC plan could chose to contribute between 3 and 50 percent of their salary into their own individual retirement account. The school district would be required to contribute 5 percent. If teachers wanted to stay with their traditional plan, they could. HB 864 would just give them more options.

This is a very important point that is worth repeating. The current bill, which has not even been referred to a committee and has virtually no chance of passing, would not change anything for anyone unless the individual teacher chose to opt into the DC plan. (To find out why some teachers might choose a DC plan, click here.) Florida has a DC option and roughly a quarter of teachers choose this plan.

Claim 4: “Missouri’s PSRS has long been admired nation-wide as one of the MOST SOLVENT pension plans IN THE NATION.”

MIX OF TRUE AND FALSE

Yes, it is true that PSRS is rated as one of the best funded pension systems in the nation. According to PSRS, PSRS was 84 percent funded as of June 30, 2018. This amounts to over $7.4 billion in unfunded liabilities. According to an analysis by Rebecca Sielman, an actuary at Milliman, this puts PSRS in the top quarter in terms of funded ratios among the 100 largest U.S. pension plans. This fact, however, says more about the sad state of other systems.

It should be noted that these comparisons are slightly suspect as they are based on plan reporting, and plans use very different assumptions. In determining that PSRS is 84 percent funded, the plan uses a high assumed discount rate of 7.75 percent to calculate liabilities. The median discount rate was 7.5 percent. That difference may not sound like much, but when you are talking about compound interest on billions of dollars, it adds up quickly. As Sielman writes, “A relatively small change in the discount rate can have a significant impact on the Total Pension Liability.”    

In an analysis for the Show-Me Institute, economist Andrew Biggs shows that if PSRS used a Corporate Bond Yield rate of 4.26 percent, the plan would be 52 percent funded and would have over $27.7 billion in unfunded liabilities.

It’s important to understand that not all of the money that is contributed to a teacher’s pension actually ends up funding the pension. Teachers contribute 14.5 percent of their pay into the pension, and their employer adds an equivalent amount, so the amount that goes into the pension is equal to 29 percent of the teacher’s salary. Only 17.44 percent is required, according to plan actuaries, to pay for the teacher’s retirement benefits. This means nearly two-fifths of the contributions are used to pay for unfunded liabilities (see p. 106 here).

Claim 5: “Missouri’s financial problems should not be balanced on the backs of teachers who have paid into the system for their entire careers. The Missouri government set the rules. We have followed them. They have not. Now, they want to blame teachers for the State’s money woes, and steal from teachers’ retirement again!”

COMPLETE NONSENSE

Ok there isn’t really a claim here, but there is a completely nonsensical assertion that this bill would somehow take money away. A version of this myth has been repeated numerous times—they want to take our pension money to pay for roads is a popular one. This bill (and every other pension reform bill that I have ever seen in Missouri) would not touch teacher contributions to the system. There is absolutely no mechanism for the state to take that money.

CONCLUSION

Teachers who spread viral posts with completely inaccurate information do not reflect well on their profession. Why are you trying to scare your colleagues? And have you thought of the unintended consequences?

My advice, teacher to teacher, is the next time you see a viral post like the one above and feel compelled to do something, consider this: read the actual bill, think critically, and do not blindly share hyperbolic posts filled with factual errors.

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Consider the costs to taxpayers. As of 2018, the plan has assets equal to less than 70 percent of their liabilities and—just to maintain that level of funding—the Missouri state government will have to contribute nearly 20 percent of its total employee payroll to the plan this year. In addition, employees hired after 2011 contribute 4 percent of their paychecks to the system. Imagine a private-sector benefit that cost nearly one-quarter of employee salaries but was considered so sacrosanct as so be untouchable. The hard truth is that we’re going to have to start talking about policy changes aimed at averting a funding crisis. Biggs’s essay explores various options, including grandfathering current plan participants and designing a new system for future employees.

Of course, MOSERS is just one of many public pension plans in the state. The pension systems for teachers aren’t any better.  Teachers argue that they work for low salaries and, in exchange for their sacrifice, they are “taken care of” with generous retirement benefits. But that is only true for those teachers who start their teaching career right out of college and work in the same state for at least twenty-five years. In fact, an analysis of the Missouri Public Schools Retirement System (PSRS)—the plan that covers all Missouri teachers other than those in Kansas City or St. Louis—found that a teacher in the Springfield district would have to work for 26 years in order to hit the “crossover” point at which their total retirement benefit is worth more than what they contributed.

Imagine that! Working for 26 years before your retirement plan is worth more than you put in.

While the PSRS is in better financial health than MOSERS, total annual contributions to the plan are 29 percent of payroll (with 14.5 percent coming from the teacher and 14.5 percent from the school district). This is only likely to get higher because there are now 78,000 teachers (active members) supporting 60,000 retired teachers. In 2000, roughly the same number of active teachers supported just 25,000 retirees. In addition, while the plan is currently nearly 84 percent funded, it has an unfunded liability of more than $7 billion and its administrators continue to assume that the plan will earn a 7.6 percent return on its investments every year, indefinitely. You don’t have to be a math teacher to know those numbers just don’t add up.

The post Public Employee Pensions: Time to Get Our Heads Out of the Sand appeared first on Show-Me Institute.

The St. Louis Post Dispatch reports “Missouri mulling pension payouts for some former state workers.” Meanwhile, the Springfield News-Leader writes “Troubled Missouri pension system offers buyouts to former state employees.” In the PD piece, State Treasurer Eric Schmitt, who is also on the MOSERS board of directors, is quoted as saying, “Now is the time to start taking our pension troubles seriously. If we don’t, it will mean less resources for our schools, roads, and health services down the line.”

The buyout for MOSERS employees would provide a lump sum payment, rather than collect pension benefits down the road. The buyout is worth less than the actuarially assumed pension benefits the workers would stand to receive; thus it would generate a savings for MOSERS and it could potentially help some workers.

The treasurer is right. We cannot keep kicking pension problems down the road and this buyout is a smart, common sense strategy for reducing pension obligations. Smart, that is, for the state. Whether it is smart for the workers to take it is another story. Andrew Biggs doesn’t think so. Check out this Twitter interaction between, Biggs, Mizzou economics professor Cory Koedel, and me. 

Biggs suggests MOSERS pensioners shouldn’t take the deal. Koedel and I offer responses in jest, as Missouri taxpayers we stand to benefit from MOSERS shoring up its bottom line. Then Biggs offers a startling calculation. He suggests the buyout is worth approximately 39% of the value of the worker’s benefits. I doubt that’s actually worse than the odds on a lottery ticket, but it is certainly not a good payout.

Does this mean no one should take the buyout? Not necessarily. There may be circumstances in which some workers might be interested in having a lump sum of money rather than a pension that pays out over a course of 30 plus years. For instance, if you don’t expect to live that long!

The most important thing here is for workers to be educated on this option. With that said, I commend the MOSERS board for exploring this option and encourage MOSERS workers to fully understand their options before making any decisions. 

The post MOSERS Pension Buyout Good for Taxpayers, Probably Not for All Workers appeared first on Show-Me Institute.

With that statement, Missouri State Treasurer Eric Schmitt described our state’s severe underfunding of public employee retirement plans. To put an issue that Show-Me Institute writers have been highlighting for years in simple terms, when initial contributions to a retirement plan are too low or don’t grow as fast as projected, spending promises can’t be kept. Either retirees are hung out to dry, or taxpayers must step up and pay what a plan cannot.

Addressing our current spending issues is essential to improving our state’s fiscal health, but if we fail to consider Missouri’s long-term pension obligations the results could be disastrous.

As any savvy investor knows, the power of compounding can make a huge difference when it comes to saving. If our investment assumptions today are even slightly different from what actually happens in the market, this difference can grow rapidly over time. A widening gap between assumed and actual returns is especially troubling, because most economists agree that estimates for pension investment returns are often too rosy.

In 2015, Andrew Biggs of the American Enterprise Institute estimated that Missouri’s public pension plans had a total of $57.3 billion in unfunded liabilities (which are calculated as current assets minus the net present value of what will need to be paid). If plan investments fail to grow enough to cover promised benefits, then a bill much larger than even $57.3 billion will hang over the budget discussions Missourians have years from now.

So how can we fix this problem? Reforms that help Missouri transition away from plans that promise payments for life and toward plans that incur their costs up front can protect our state from investment risks. Schmitt illustrates this perfectly when he says “Our goal as a state should be to fully fund our obligations as they are incurred instead of putting the burden on the backs of our children and grandchildren.” Policymakers should consider adopting this goal—the sooner, the better. 

The post Pension Reform in Missouri appeared first on Show-Me Institute.

Similarly, an investment that initially seems negligible can go a long way given enough time to compound, and this lesson applies when saving for the future. In June, the Missouri State Employees’ Retirement System (MOSERS) decided to reduce its assumed return rate from 8% to 7.65%, meaning that altogether, the amount members will need to contribute next year will increase by almost $50 million. This extra cost today is hardly ideal, but in the long run it helps avoid a much larger bill.

Even though MOSERS made a mere 0.35% change to their expected return rate, the long-term impacts are huge. With a lower rate of return on its assets, a pension plan’s initial contributions must go up in order to keep benefits constant. In other words, a plan compensates for slower investment growth by putting more money in initially.

This change in funding highlights the risks associated with promising high investment returns. If a pension plan’s actual returns are lower than predicted, the result is a gap between available funds and the amount that has been promised to retirees. In the case of a guaranteed public employee retirement fund, taxpayers can be asked to cover this difference, and as the gap grows, so does the burden on taxpayers.

With a current funding ratio (current assets divided by the net present value of liabilities) of 67.8 percent, the plan (according to a Columbia Tribune report) will require $394.5 million this year to cover promised benefits.  But this contribution amount will only be sufficient if investment returns match the 7.65% expectation.  If investment growth is lower (in FY 2016 MOSERS generated a time-weighted return of only 0.3%), then the funding gap will widen over time. It’s easy to project high investment returns today, but making those predictions come true tomorrow is another story.

Slight adjustments in return assumptions can have tremendous impacts over an employee’s lifetime, so properly estimating investment returns is essential to a plan’s sustainability. (This essay by Andrew Biggs provides a comprehensive discussion of public employee pension funding for readers who want to explore this topic in more depth.) If pension benefits are guaranteed to employees, then the cost of these promised future benefits should be priced using returns on very low risk assets like government securities, which are currently far below 7.65 percent. Lowering the assumed return is a step toward greater transparency regarding the true costs of pension liabilities.

The post MOSERS Wisely Reconsiders Past Assumptions appeared first on Show-Me Institute.

Some may look at this not as an indictment of our pension plans, but on how “little” we spend on higher education. Indeed, a few months ago, I sat in a meeting trying to figure out how the College of Education at the University of Missouri–St. Louis could cut costs. As the St. Louis Post-Dispatch has reported, the university is facing a serious budget crunch. While I examined the figures with a group of colleagues, one professor suggested that the real problem was declining state aid for higher education.

But let’s say we want to spend more on higher education. Where does that money come from? It doesn’t get created out of thin air. Given Missouri’s anemic economic growth, the available pie of state funds isn’t getting any larger. Any new funds for education will likely come either from another program or from taxpayers. The same can be said of rising pension costs. As we spend more on pensions, we will either have to cut back on funding to higher education and other services or we will have to take more from taxpayers. There is no magic third option; someone has to pay the piper.

As the Show-me Institute has highlighted many times, Missouri’s pension plans are a “looming crisis.” In a 2015 Show-Me Institute Policy Study, Andrew Biggs wrote:

Using standard actuarial valuation, Missouri plans are, on average, 78 percent funded and unfunded liabilities are slightly below $17 billion. Using a fair market approach, funding ratios lie between 41 and 52 percent and unfunded liabilities total from $57 to $89 billion.

In other words, our current obligations far surpass how much we have set aside in pension funds.

Unless Missouri changes how we structure our pension systems, we can expect our obligations to pension funds to grow. This will continue to put pressure on the state budget and will continue to divert spending from other government programs, such as higher education.

The post Missouri Spends More on Employee Retirement Costs than Higher Education appeared first on Show-Me Institute.

Last week, Bellwether Education Partners reported that Missouri is one of only 10 states currently spending more on public employee retirement programs than on higher education. You read that right. We spend more on pensions for public employees than we do for all of our state’s public colleges and universities.

Just a few days later, the St. Louis Post-Dispatch reported that the state treasurer was revising downward the expected rates of return for the money in the state’s pensions systems to adjust to slower growth in the stock market. This means the funds themselves are even more underfunded than we thought and may need huge infusions of tax dollars to meet their obligations to the state’s workers.

Add this news to what we already know about pensions, and the full, dismal picture emerges. Remember, teachers in PSRS, the state’s main teacher pension system, must spend at least 28 years paying into the system before their retirement earnings will exceed what they contributed while working. Sixty-five percent of Missouri teachers will not hit that mark and will be net losers in the system. In addition, state pension funds are investing in increasingly risky investments in order to chase higher returns.

What more do we need to know before we push for change?

Most public employees in Missouri belong to what are known as defined-benefit pension plans.
These guarantee a pensioner a specific amount of money every year for the duration of their retirement. In most cases, the amount these plans pay out to retirees is not based on how much money an employee has contributed, but rather on a formula that only takes into account a few years of service. For teachers in PSRS, only the three highest consecutive years’ salaries are used in retirement calculations. This allows individuals who get large pay increases in the final years of their careers to draw considerably more than they ever contributed into the retirement system.

In order to keep the promises Missouri makes to public employees through these plans, the state will face mounting pension obligations. In a recent paper for the Show-Me Institute, Andrew Biggs, resident scholar at the American Enterprise Institute, calculated Missouri’s unfunded pension liabilities. Using standard methods from the Government Accounting Standards Board, the unfunded liabilities are nearly $17 billion.  Using more conservative estimates,  the unfunded liabilities total between $57 and $89 billion depending on the means of calculation.

As liabilities grow, state support for pensions will have to grow as well, and funding for pensions has to come from somewhere. It may come from other public programs, such as higher education, or it may come from taxpayers. The debts we are incurring now will limit our ability to invest in the future of our students and our state. That is a recipe for neither growth nor prosperity.

The post Missouri’s Pension System Must Change appeared first on Show-Me Institute.

The Funding Status of State and Local Government Pensions in Missouri – Andrew Biggs, Ph.D.             

Betting on the Big Returns: How Missouri Teacher Pension Plans Have Shifted to Riskier Assets –James Shuls, Ph.D., and Michael Rathbone

Pension Reform in Missouri – Erin Hawley

Teacher Pension Enhancement in Missouri: 1975 to the Present – Robert Costrell, Ph.D.

Missouri Transition Costs and Public Pension Reform – Andrew Biggs, Ph.D.

Public Employee Pensions In Missouri: A Looming Crisis – Andrew Biggs, Ph.D.

But as informative and compelling as these papers are, there is just something engaging about a video with hand-drawn illustrations. That’s why I love this new video released by TeacherPensions.org, a project of Bellwether Education Partners. In less than three minutes, the video shows the key problems with teacher pensions. Check it out.

The post A Must-Watch Video about Teacher Pensions appeared first on Show-Me Institute.

Missouri has nearly the lowest cost of living in the country. Each dollar I spend in Missouri goes quite a bit further than it would in a high cost-of-living state, such as California or Maryland. As a result, residents of low cost-of-living states, even if paid less, might be able to afford more than people working the same job in a high cost-of-living state. A comparison of pay among the states that does not adjust for regional differences in the cost of necessities like rent, food, and gas is not very meaningful.

A better way to determine whether state employees are underpaid would be to compare state employee compensation with the pay of people performing similar jobs in the private sector. How much do maintenance workers, office clerks, and lawyers make working for the government versus working for a private business located in Missouri?

Andrew Biggs and Jason Richwine of American Enterprise Institute looked at state employee compensation this way. They found that in Missouri state employees often make more—by an average of 7 percent—than comparable private-sector workers when the value of benefits is factored in. In other words, Missouri state workers are not in urgent need of an across-the-board pay increase; in fact, they’re often compensated more generously than their private-sector counterparts.

Perhaps we shouldn’t fault AFSCME for using misleading information to suggest that Missouri state employees are underpaid. It’s not AFSCME’s job to conduct a serious study of the adequacy of public employee pay; AFSCME’s job is to get more for its members. Members of the public should keep this in mind any time a government union issues a statement on public policy.

The post Surprising No One, Big Government Union Wants State to Spend More appeared first on Show-Me Institute.

Jessica Canale is an art teacher in North Saint Louis City. She commutes every day from O’Fallon, Illinois. While it might seem like a trivial decision to choose between working on the east or west side of the Mississippi, in actuality, when it comes to the money that will be available when she retires, it matters a great deal.

In January, Dick Ingram, executive director of the Illinois Teachers Retirement System (TRS) explained just how bad Illinois’ fiscal position has become. In order to deliver promised benefits, the state has divided teachers into two categories—Tier I and Tier II.

Tier I teachers will enjoy promised benefits, while Tier II teachers, those hired after 2010, will receive greatly reduced benefits. According to Ingram, “Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions means reduced long-term costs for the state.”

But “reducing pension benefits” is an understatement. In order to pay for Tier I pensions, Tier II teachers and administrators will have to contribute 9.4 percent of their salary while only receiving 7 percent toward their retirement. No wonder Jessica would rather commute to Saint Louis than give 2.4 percent of her compensation to older teachers.

But Missouri is not much better. According to the National Council on Teacher Quality, Missouri’s pension plan earned a grade of D-.

In his 2013 policy study on public employee pensions, AEI resident scholar Andrew Biggs called the situation in Missouri a “looming crisis.” Luckily, he offered several suggestions:

• Promote better accounting, which will show the extent to which plans are underfunded.
• Attract and retain quality public employees like Jessica by changing existing plan structures to either a defined contribution or a cash balance approach.
• Give employees more freedom to choose the retirement plan that works for them.

As Show-Me Institute analysts have continuously argued, there are solutions to Missouri’s pension problems. For teachers like Jessica, Missouri has to do better.

The post Teacher Pensions: Let’s Not Become Illinois appeared first on Show-Me Institute.

Last year, the Show-Me Institute released a report by Dr. Andrew Biggs of the American Enterprise Institute. The report showed how Missouri public pension plans are underestimating the total amount of unfunded liabilities (total pension obligations that exceed the amount of assets the pension plan has) that they have. In fact, using more realistic assumptions, five of the state’s largest pensions have unfunded liabilities FIVE TIMES larger than what is reported ($54 billion actual vs $11 billion reported). That is a serious amount of money, and if these pensions do not have the assets to cover their obligations, then the taxpayer (you and me) will be left footing the bill.

State Budget Solutions, to my knowledge, does not have the gift of prophecy either. Yet they see what we see when they look at the status of state public pensions. Their new report discusses the unfunded liabilities of every state’s pension system. The content of the report sounds familiar because, like Dr. Biggs, they find that using more realistic assumptions about plan returns, state public pensions are significantly underfunded. According to State Budget Solutions, Missouri’s pensions aren’t among the worst nationally. That doesn’t mean things are good and the state’s pensions don’t need reform. If I’m stuck holding a stick of dynamite, while my neighbor is holding an atomic bomb, it doesn’t mean I’m going to be okay when the dynamite goes off.

Unfortunately, there has been little progress into actually achieving pension reform in Missouri. At the very least, the state needs to work to stop additional liabilities from being added to the already enormous amount the state already owes. Shifting to a defined contribution plan or a cash balance plan would be a good place to start. Then, policymakers can work on addressing the gap between pension assets and the monies these plans owe.

Cassandra warned of danger, and she was not believed. That was her curse. Hopefully, Missouri can avoid Troy’s fate.

The post This Sounds Familiar appeared first on Show-Me Institute.

An interesting point raised in the report was that, “…the discount rate used in the valuation of liabilities should be a low-risk rate, ideally as low as the rate on Treasury bonds.” In a Show-Me Institute Policy Study, Andrew Biggs also urged state pensions to use a low-discount rate in valuing their liabilities (the discount rate is the interest rate that pension plans use to translate future liabilities into current dollars). It’s encouraging to know that other institutes are reaching similar conclusions.

However, it isn’t encouraging that this report found that after using a more appropriate discount rate, the amount of Missouri’s unfunded pension liabilities totaled more than 4 percent of Missouri’s entire economy. As of the end of last year, Missouri’s economy was $258 billion; 4.2 percent of that is $10.8 billion. If the state cannot make up that amount, then you, the taxpayer, are on the hook to make up the difference. There are other states whose pensions are in much worse shape than Missouri’s, but our state still faces an economic ticking time bomb. Whether dealing with a grenade (Missouri) or a daisy cutter (Illinois), taxpayers will not be happy to be caught in the blast. The Show-Me Institute has written extensively about how Missouri can start to address its pension problems by shifting to more efficient plans such as defined contribution or cash balance plans. Hopefully, this new report can serve as a wake-up call to policymakers that change is needed.

The post Breaking: Another Study Backs Up The Show-Me Institute appeared first on Show-Me Institute.

Last November, the Cooperating School Districts of Greater St. Louis pitched the idea of providing high-quality teachers as instructional coaches in struggling schools. A similar idea was raised by CEE-Trust, the consulting firm that the Missouri Department of Elementary and Secondary Education hired to address problems in the Kansas City School District. The CEE-Trust proposal called on accredited school districts “to play a significant role in helping [unaccredited] systems improve.” The St. Louis Post-Dispatch heaped praise on this idea, calling it among the “more promising ideas.”

However, there is one easily overlooked obstacle standing in the way of turning this localized version of a teacher peace corps into a reality in our two biggest cities: the incompatibility of different pension systems.

The suburban districts are a part of the Public School Retirement System (PSRS), as are all other school districts throughout Missouri – with the exception of Saint Louis and Kansas City, which have autonomous pension systems. If a teacher moves from PSRS to one of the city plans, he or she will incur a significant loss in pension wealth.

This is not a new problem, but a longstanding one. Saint Louis and Kansas City have been struggling with this for years. Research by University of Missouri economists has demonstrated that the separate pension systems create a barrier to recruiting school leaders into the two urban school districts. The separate pension systems also limit the pool of teachers who are willing to work in the cities. Jeffrey Kuntze, chief operating officer of the Confluence Charter Schools in Saint Louis, says “the separate pension systems make it extremely difficult for us to recruit veteran teachers from the county. We can get them when they retire, but not mid-career.”

These pension boundaries are not a problem for Normandy and Riverview Gardens, which are in PSRS, but they would make it practically impossible for high-performing school districts to operate a program, run a school, or loan teachers within the Saint Louis or Kansas City boundaries. They simply could not move teachers or school leaders across pension boundaries without making them suffer great financial penalties.

There is no easy way to solve this problem. Some have suggested we move Saint Louis and Kansas City into PSRS. This sounds like a good idea but is practically impossible because of Social Security. City teachers pay into it while PSRS teachers do not. Schools in Saint Louis and Kansas City cannot withdraw from Social Security. In effect, we have a Hotel California problem — urban schools can check out any time they like, but they can never leave Social Security.

The only real solution is to close the current systems to new entrants and place them in a new, statewide system that participates in Social Security. Before this idea causes mass hysteria, let me stress that this would not affect current employees’ or retirees’ pensions. They would remain secure in their current system. It would, however, remove the artificial pension boundaries and allow us to create a better pension system for teachers and students.

Opponents of this idea claim that closing the current defined benefit systems would be financially unsound, as it would lead to considerable “transition costs” that would far outstrip any benefits that we may receive. This is the very issue tackled in a recent Show-Me Institute policy study by Andrew Biggs, a resident scholar at the American Enterprise Institute. Biggs examines the evidence for “transition costs” and concludes that the concerns are “largely mistaken and should not stand in the way of public employee pension reforms.”

Whether you believe busing teachers into failing schools is a viable solution or just another feel-good proposition, fixing this pension problem should be a top priority. Missouri should not have a system that puts our neediest communities at a disadvantage when it comes to recruiting talented teachers.

James V. Shuls, Ph.D., is the director of education policy at the Show-Me Institute, which promotes market solutions for Missouri public policy.

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This behavior is taking place in Missouri. For example, in the late 1990s, the Missouri Department of Transportation and Highway Patrol Employees Retirement System (MPERS) had 42 percent of their assets in fixed income and cash. Equities and alternative investments such as real estate made up the rest. Now, MPERS has 22 percent of its assets in cash and fixed income.

The pensions are doing this “to deliver higher long-term returns in order to keep funding costs low . . .” In fact, in one of our previous policy studies, Andrew Biggs noted this phenomenon when examining how Missouri’s public pensions value their liabilities: “U.S. public sector plans, by contrast, have taken on greater investment risk, because doing so allows them to lower the accounting value of their liabilities and put off difficult decisions such as raising contributions or lowering benefits.”

I don’t have a problem with a pension plan seeking higher returns, but if these investments don’t deliver as hoped, then Missouri taxpayers will be on the hook to make up the shortfall. That is why I favor retirement plans such as defined contribution plans or cash balance plans that limit the exposure of the taxpayers to investments failing to generate expected returns. Hopefully, we can make a shift before one of these risky bets fails to pay off.

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