COMMENTARY: Actuaries ponder ‘pension funding to avoid ruin’

Monday, March 26th, 2012

By Frank Keegan | State Budget Solutions

WASHINGTON, D.C. — Here’s our choice, America: Live or die on the toss of a coin. Or take the sure, safe option of guaranteed quadrapleagia for life. That’s how one actuary phrased it when they gathered here Monday for opening session on the fate of public pension plans. 

He did not identify himself when commenting after a panel discussion leading off actuaries’ annual meeting here this week on municipal and state “Pension Funding to Avoid Ruin.”

Can America avoid being ruined by public pensions? The actuaries’ bottom line: Maybe.
Public pension funds are so far in the hole they either have to gamble on risky investments or inflict economic paralysis now through massive tax increases and crippling service cuts. According to one estimate, U.S. taxpayers need to write a check for more than $4 trillion immediately to prevent certain catastrophe or gamble that economic growth and market gains never seen in history will cure this fatal fiscal disease eventually.
Medical metaphors prevailed early Monday when panelist Gene Kalwarski told more than the packed main ballroom that being a pension actuary now is “like being a mortician during a plague.”
Kalwarski, Cheiron Inc. CEO, said when it comes to defined benefit pensions, “The traditional model is broken.”
He said increasing discount rates and focus on peer rankings leads to pension funds  “chasing each other up the ladder of high risk” seeking increased returns.
“Expected rate of return will never happen. You never gain as much as you lose,” he said.
He said the system has built-in incentives to put taxpayer money into risky investments. “The investment community is making a lot of money on these defined benefit plans, and I don’t think (the) incentive to change is there.”
Politicians love projections of higher investment returns so they don’t have to contribute as much to pension plans now, sticking future taxpayers with the costs. when investments fall short.
Panel member Dallas Salisbury, president of the Employee Benefit Research Institute, led off the discussion with the forecast that “In the absence of radical change, those benefits cannot be paid; those promises cannot be kept.”
The Government Accountability Office released a report this month that confirmed some public pension funds will run out of money in a decade, and others eventually must become insolvent without a lot more from residents who will get no government services from paying the higher taxes.
Salisbury said “There is not enough connection between investment advice given to funds and actuarial advice.”
He told his fellow actuaries that by pushing the issue of pension underfunding, “You have been helping get things better for people.”
Panelist Paul Angelo, senior vice president of The Segal Co., said “the existing model is NOT broken, but needs to be improved. It is up to us in the actuarial profession to influence.”
He said he hears people advise actuaries to think out of the box, “But in the public sector, we don’t have much of a box. We may need more of a box.”
He said laws and rules dealing with public pensions allow “bad governance policy,” particularly when it comes to calculating how big the liability is and how much must be contributed to pay for it.
State and municipal governments tend to underestimate how much they owe and then short the contributions.
“If you are not going to fund the liability, it doesn’t matter how you measure it,” Angelo said.
He said perceived pension fund “surpluses were actuarial herion” for politicians who — despite warnings from actuaries — expanded benefits and cut contributions, setting up pension funds for a sure crash.
One audience member asked from the floor, “What are your options as an actuary?” when that happens.
Panelist answers ranged from “go for headline news; you can’t just write a 10-page report and go away,” to “It’s better to get fired than resign.”
Public pensions are only a half dozen among more than 80 sessions through Wednesday. America’s private pensions are in distress, too, as the recent book “Retirement Heist” documents. But private pensions are not guaranteed by state constitutions and statutes as public pensions are.
Other public pension sessions Monday were an overall update — at best, not good — and a review of proposed Government Accounting Standards Board “Brave New World” recommendations to limit politicians’ ability to lie about how bad things really are.
The fundamental problem is state and municipal politicians have been using public workers’ pensions as secret credit cards to run up massive debts there is no way to repay. Politicians bet the debt would not come due until they had enriched themselves at the public trough and fled the scene, their own bloated pensions safely guaranteed.
Actuaries use assumptions — ranging from investment returns to life expectancy — as a base for doing the thousands of complicated calculations to predict the future for pension plans, and they talked about most of them Monday.
But the one big assumption that did not come up is taxpayers docilely submitting forever to huge tax increase and government service cuts so public pensioners get paid first.
That assumption may not be such a sure thing.
CLARIFICATION: The initial version of this column was not clear that the context of a quote from Gene Kalwarski was my opinion and not a paraphrase of anything Mr. Kalwarski said. His quote was referring to pension fund peer performance rankings resulting in funds “chasing each other up the ladder of high risk.” 
Frank Keegan is editor of a project The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability. [email protected]

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