An Actuarial and Economic Analysis of State and Local Government Pension Plans

A study of future economic problems is being directed by the Joint Economic Committee. The goal of the study is to obtain more accurate estimates of future outlays from pension plans and the potential effect of these outlays on the Nation's economic resources. The main focus of the study was projecting the cost to State and local government pension plans of future benefit payout. To place benefit payout in perspective, benefit projections were compared to contribution and asset growth projections which allowed a simplified flow of funds analysis. The projections presented do not pretend to predict future events exactly. Their purpose is to provide a better understanding of emerging financial problems, given reasonable assumptions about future economic and demographic changes. The projections are a result of aggregating all state and local government pension plans into two prototypes. Aggregating the plans masks the differences among them, but allows a clear look at long-term trends so that problems can be addressed before they become worse. The basic approach of the analysis was to: (1) divide the universe of over 6,600 state and local pension plans into homogeneous subdivisions, (2) develop prototypical plans representing the current characteristics of state and local government employees, (3) forecast employment and salary levels for each subdivision using reasonable assumptions about future economic and demographic growth, and (4) create an actuarial model to project cost streams and employment levels for the prototypical plans.

Analysis on state and local governments' pension plans in the aggregate of their financial soundness showed evidence of an increasing financial burden on state and local governments. This problem is largely caused by the increasing proportion of retirees in the population of state and local government employees. Varying the economic parameters changes only the year in which the problem is first evident. Furthermore, growth in employment above the levels shown does not seem likely, and the characteristics of the plans were purposely unchanged, since a basic tenet of the review was to see what would happen if current benefit and financing provisions were continued. The projections of the plan are driven by large plans, which are generally better funded and which contain the highest percentage of employees. However, it is estimated that only 20 percent of state and local employees are enrolled in plans that are fully funded by actuarial standards. Statistics show that from 72 state and local government pension plans 53 could not meet the funding standards imposed by the Employee Retirement Income Security Act of 1974 on private pension plans. These facts, combined with the growth in the proportion of retirees, explain why the financial status of the plans in the aggregate begins to deteriorate in the 21st century. Under some conditions, the decline is more rapid but the conclusion is the same. Benefits exceed the sum of asset growth and contributions in 2049. This indicates that the plans would not be able to meet obligations from current income.