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Retirement Issues for the 21stCenturyNational Press Foundation
Washington, D.C.
June 13, 2011
Diane Oakley
Executive DirectorNational Institute on Retirement Security
The Future of Public Pensions
www.nirsonline.org
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Why Increased Focus on Public Sector &
Pensions?
Source: New American Foundation, Bureau of Labor Statistics, Westwood Capital
Seen inaccurate assertions inoutsized growth of public sectoremployment.
Middle class jobs in the privatesector are disappearing.
The share of middle income jobs inthe U.S. fallen from 52% in 1980 to42% in 2010.
Middle income jobs have beenreplaced by low income jobs, whichnow make up 41% of totalemployment.
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Private Sector: Lower Income Now,
Less Retirement Security Later
Source: New American Foundation, DOL,PBGC, EBRI
Private Sector Workers Participating in Employer BasedRetirement Plan by Plan Type, 1979-2008 (all workers)
Source: New American Foundation, Bureau ofLabor Statistics, Westwood Capital
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Wall Street Meltdown Dealt
Severe Blow to Middle Class
Source: New American Foundation, Bureau of Economic Analysis
Household net worth declined
from $65.7 trillion in the secondquarter of 2007 to $56.8 trillion inthe fourth quarter of 2010.
Wealth recovered $8.1 trillionsince the first quarter of 2009,
due mostly to recovery of stockprices.
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Already, Severe Private Sector
Shortfall in Retirement Savings
The median value of retirementsavings for retirees is $45,000
The average retiree has aretirement savings shortfall of$47,732, with larger shortfallsamong low-income Americans
Many Americans were relying
on rising home values to financetheir retirement and have undersaved.
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Great Recession Fallout on Middle
Class: Home Equity & Wealth
Source: New American Foundation, Kennickell (2009)
Home equity makes up a greater shareof wealth for the middle class than forwealthy families.
For families up to 90th percentile of networth, home value makes up 50% ofworth.
However, significant decline since 2007,Case Shiller Home Price Index declinedby 30%, could fall another 10-20%.
Dont forget 23% of all residentialmortgages underwater.
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Public Pensions: Strong Financials for
Most Plans Going into Financial Crisis
8588
96
103
91
85
9088
87 8688
8479
77
0
20
40
60
80
100
120
1994 1996 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Aggregate State and local pension funding level assetsas a share of trust fund liabilities (percent)
Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999)
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0%
5%
10%
15%
20%
25%
30%
40-49 50-59 60-69 70-79 80-89 90-99 100+
Funding Ratio (Percent)
Distribution of Funded Ratios for 126 Largest State, Local Pensions, 2010
Vast Majority of Public Plans Well Funded
Source: Center for Retirement Research, Boston College
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Public Pensions Showing Strong Recovery
Change in Combined Assets of State & Local Government Pensions:2003 2010
Source: National Association of State Retirement Administrators
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13.1
0.4
4.55
8.8 8.8
0
2
4
6
8
10
12
14
1 3 5 10 20 25
Years ended as of 12/31/10
Median annualized public pension fund investment returns
for periods ended 12/31/10
Strong Investment Returns:
Exceed 8% Over Two Decades
Source: NASRA based on Callan Associates Data
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Historical Snapshot: Investment Returns
Source: Gabriel, Roeder, Smith & Company
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Using Theory Rather Than Reality Artificially
Inflates Public Pension Costs
Risk-Free Rate Leads to Increased Costs
Source: Government Finance Review, February 2011
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Using Theory Rather Than Reality Artificially
Creates Surplus
Risk-Free Rate Leads to Excess Funding
Source: Government Finance Review, February 2011
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Public Pensions Are Small Portion
of State/Local Budgets
Source: U.S. Census Bureau
Employer (taxpayer) contributions as a percentage
of all state and local government spending, FY 08
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On Average, Public Pension Benefits Modest,
With 30% of Workers Not Eligible for Social Security
Source: U.S. Census Bureau
1,326
1,306
1,377
1,430
1,488
1,5571,584
1,497
1,7161,775
1,847
1,8711,865
1,852 1,871
1,888
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Average Monthly Public Pension Benefit, 1993-2008(2008 Constant Dollars)
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Employee and Employer Pension Contributions, 1982 to 2009
Public Pensions Typically Are Shared
Funding Responsibility
Source: U.S. Census Bureau
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Public Pensions Implementing Changes
to Ensure Long-Term Sustainability
Source: Government Finance Review, February 2011
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By itself, freezing plan does nothingto close and funding shortfalls
Freezing plan undermines theeconomics of the plan by starving itof new entrants
Because of accounting regs, plan
costs can actually increase
Undermines retirement readiness
DB to DC Switch Not a Viable Solution
Source: National Institute on Retirement Security, Look Before YouLeap
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Pensions Make Sense for Public Sector
Sector Employers, Taxpayers
State and local governments also have a strongcomparative advantage relative to private industry inoffering pension benefits.
Since many of the most common government jobsfirefighter, police officer, corrections officer, regulatoryoverseerhave no direct private sector analog, thelifetime-with-one employer career path scorned by many
in the private sector makes a lot of sense for governmentemployees.
Eli Lehrer, Heartland Institute, Weekly Standard, March 28, 2011
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84% Americans Concerned Current Economic
Conditions Hurt Retirement
American Retirement Panic Attack
Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A
Roadmap for Policymakers
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Private Sector Wants Pensions
81% of Americans Say They Need Pension For
Independence, Self-Reliance
Source: National Institute on Retirement Security, Pension and Retirement Security 2011, A
Roadmap for Policymakers
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Regulations, Funding Volatility Kill
Private Sector Pensions - Not Costs
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Corporate vs. Public Pension Funding Levels, Costs
Comparison of corporate and public
pension funding levels, 2000 to 2010Comparison of change from prior year in corporate
and public pension contributions, 1989 to 2009
89909192 9 9 9 9 9 9899000102 0 0 0 0 0 08 09
0
0
80
-20
20
0 Corporate
Public
US Dept of Labor,
US Census Bureau,Milliman
*
* stimate
00 01 02 0 0 0 0 0 08 09 10
80
100
120
FundingLevel
Corporate
Public
Wilshire, Milliman, and
Public Fund Survey
*
*Estimate
Regulations, Funding Volatility Kill
Private Sector Pensions - Not Costs
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Costof C Pl s ofP oll
. .
Pl C Pl
Cost
No Longevity Risk Pooling
Less l nce Portfolio
LowerReturns/HigherFees46
S vings
Pensions Most Economic lly Efficient
Retirement Pl n: HALF the cost
Source: N tional Institute on Retirement Security,A Better Bang for the Buck
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The Real Retirement Issue?
Underfunded Individual Accounts
Source: Michael Kitces, The Nerds Eye View in The New YorkTimes
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Future Outlook?
Public pensions will continue to recover.
States will continue to implement changes to ensurelong-term pension sustainability.
State & local government will continue to offerpensions with supplemental DCs.
Watch for NIRS forthcoming study on public pensionsustainability.
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Additional Resources
American Benefits Council Lynn Dudley
Boston College Center for Retirement Research Alicia Munnell
Chamber of Commerce Aliya Wong
Center on Budget and Policy Priorities Elizabeth Liz McNichol
Center for Economic & Policy Research Dean Baker
Center for State & Local Govt. Excellence Beth Keller
Groom Law Group Ian Lanoff
ERISA Industry Committee Mark Ugoretz
Employee Benefits Research Institute Dallas Salisbury
Government Accountability Office Frank Todisco
Heritage Foundation David John
National Assn. of State Retirement Administrators Keith Brainard Penn State University Ron Gebhardtsbauer
Segal Company Cathie Eitelberg
University of Massachusetts Christian Weller
Yale University Jacob Hacker
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Diane Oakley
202.457.8190
www.nirsonline.org