The Decline of Defined Benefits

The Pew Trust released a report recently on the state of public pensions in the US. The report is not real good. Under the Government Accounting Standards Board public agencies, like their private counterparts, are required to account for future liabilities, funded and unfunded. As the rule was phased into effect it became clear that public pensions were on a rocky road. Nationally Pew estimates that pensions are actually pretty well funded for their future obligations. The future obligations we owe to public employees amount to $2.35 Trillion. To cover that obligation there is about $1.99 Trillion saved, leaving an unfunded liability of $360 million. (About 85%)

The California obligations are in the range of $355.5 billion and about 87% of that has been set aside.

But the problems come from other benefits, primarily health benefits. Pension costs are relatively predictable over time. Health benefits less so. The estimate of the health liabilities amounts to $381 billion, but of that obligation only $11 billion has been set aside for the health and similar benefits. That amounts to an unfunded liability of $370 billion. California's portion of that $381 billion is $48 billion - and none of the future obligations are funded. California at least has been thinking about this issue and should have a report to the legislature back by the first of the year. When you add these two together for public employees the unfunded liability becomes almost $100 billion for the state - or a bit less than 25% of the total obligations of the state in this area.

An EEOC ruling today makes this an even more interesting. The Commission ruled that employers can eliminate post retirement health benefits when their employees become eligible for Medicare. Not all public employees are eligible for Medicare and it is unclear whether the ruling will cover public employees - but the direction of the action is clear.

In the long term, public pension systems are going to have to get rid of defined benefits plans - whether that goes prospectively to future employees or whether the unfunded liabilities especially of health costs are reduced quickly remains to be seen. But the reductions are sure to come.

Originally, the rather generous pensions were offered with the rationale that public employees were less well compensated. But current compensation rates for most public employees no longer generate these long term liabilities whether they are funded or not.

The Full Report,Promises with a Price, can be found on the Pew site. It is a good piece of research.