Unfunded Teacher Pensions Grow, of Course

DodoThe National Council on Teacher Quality (NCTQ) issued its annual State Teacher Policy Yearbook, in which its claims "teacher pension systems in the United States have almost $325 billion in unfunded liabilities." The conclusion seems plausible. The underfunded pensions for teachers can be added to those of many corporations, states and municipalities. All have been plagued by contributions that have been too small, or wild assumptions about the rates at which investment portfolios will grow.

To offer more detail, the organization points out:

Funding shortfalls have grown in all but 7 states between 2009 and 2012. Pension underfunding is even worse than meets the eye due to unrealistic assumptions and projections about returns on investments. Even with states almost certainly overestimating how well funded their pension systems are, NCTQ finds that pension systems in just 10 states are, by industry standards, adequately funded.

It can be said safely that the problem will take years to resolve, if it can be resolved at all.

Lack of proper contributions may be a relatively small root cause of the issue. Pensions, even those at major universities, have believed that their well-conceived investments in a wide array of venture capital funds, private equity, public stocks, bonds, high-yield instruments and even derivatives products would assure that their positions could outperform the broader markets. Almost every investor in the world thinks similarly. If investment plans work, the size of the pensions always will be larger than their obligations. Brilliant investment tactics would make certain that the appropriate amounts would always be available. Against the assumption, the NCTQ wants "systematic reform" of the current system. And that has to include forecasts of how well investments will perform.

In the most recent yearbook, the authors make the following point, and without these suggested changes, the fruits of the pension system cannot be improved:

States need to take action to secure the financial health of teacher pensions by beginning to adjust unrealistic assumed rates of return and make scheduled payments to their pension systems. Systemic reform of teacher pensions requires states to make tough decisions that are right for the long term. Unfunded liabilities serve no one well. And stretching liabilities out over enormous time or maintaining assumptions of rates of return that are unsustainable is a house of cards that is bound to collapse.

No other path exists.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Infrastructure Tagged: featured

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