Teachers’ pension plans are underfunded to the tune of an eye-popping $933 billion, according to an analysis released this morning by the Manhattan Institute and the Foundation for Educational Choice. That’s close to three times more than official state government estimates of these defined-benefit plans’ liabilities, the paper states.
The authors attribute the gap to accounting rules for public pensions that permit actuaries to “discount” future obligations based on estimates of how the investments will fare over time. Unlike in private-sector plans, they aren’t required to take into account how risky those investments are, and generally assume a strong stock performance. (Private pensions, the authors state, are often discounted at rates close to the yield of high-quality corporate bonds.)
If the market doesn’t perform as desired, states will have to meet the gap between projections and actual benefit costs by raising taxes and, potentially, by scaling back other education services to meet the pension obligations. Think larger classes, fewer teachers, and less money for instruction.
The report adjusts the calculations of teacher-pension plans’ present liabilities on the basis of discount rates at use in the private sector. It also adjusts them based on the market value of current investments to reflect the last few years of economic downturn.
Based on those calculations, the authors report that the worst-funded plans are in West Virginia, which the study claims is only 31 percent funded, and Illinois, at only 32 percent funded.
Five plans are at least 75 percent funded: teacher plans in New York, Washington state and the District of Columbia, and state retirement systems in North Carolina and Tennessee that include teachers, according to the report.
It lists some recommendations for pension reforms, including the shift to defined-contribution plans and hybrids like a cash-balance plan (see this story for more on those options). But such changes have generally been unpopular among teachers and teachers’ unions.
A version of this news article first appeared in the Teacher Beat blog.