Broadcast Retirement Network’s Jeffrey Snyder discusses pension reforms put in place after the 2008 financial crisis with R Street Institute’s Chris McIsaac.
Jeffrey Snyder, Broadcast Retirement Network
Joining me now is Chris McIsaac.
He’s a fellow with R Street Institute. Chris, so great to see you. Thanks for joining us on the program this morning.
Thanks, Jeff.
Chris McIsaac, R Street Institute
Appreciate the opportunity to be on the show.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, and look, I love when we talk about retirement, and I specifically love when we talk about pensions. Chris, you did a great piece for Governing.com around a lot of the pension reforms that have happened around 2008 going forward. Do you want to take us back for a second?
Just talk at a very high level. What were some of these reforms, and how did they set public pension plans on the straight and narrow?
Chris McIsaac, R Street Institute
So if you go back to the time period right before the Great Recession, so say 2007, pension funds at the state and local level were almost 90% funded on a nationwide basis. Just two years later, they had fallen all the way down into the 60s as a result of the market mayhem that occurred in the financial crisis and the Great Recession. So in response to that, state lawmakers all across the country took steps to try to shore up the funds and provide some relief to their budgets that were really getting hammered as a result of the losses.
So what we saw in response were really three different types of reforms. Number one, we saw just additional money flowing into the system through increased contribution rates. We saw some reforms to the actual benefit design for future public workers, and those were designed to help curb the liability growth moving forward.
And then the third bucket was adopting more conservative assumptions around things like investment returns in order to prevent the future risks of investment losses hitting the funds quite as hard as they did.
Jeffrey Snyder, Broadcast Retirement Network
And these reforms by and large, I mean, at a very high level, I guess there are always exceptions to the rule, Chris, but these were very successful reforms and really got these funds. These are important benefits, police, firefighter, government workers, very important benefits. They attract and retain workers.
But it seems like these reforms really helped kind of buoy the plans at a very difficult time.
Chris McIsaac, R Street Institute
Yeah, that’s right. They’ve definitely had a positive effect, though it’s been slow and steady, I would say, in terms of the improvements. It’s taken almost 15 years now to get just back to in the low 80s in terms of funding levels.
So the funds still have not recovered to the points that they were at before the Great Recession hit. But as a result of, like I mentioned, all the contribution increases and some of the benefit reforms, the funds are on a much more stable footing and on a good trajectory of continued improvements in funded levels.
Jeffrey Snyder, Broadcast Retirement Network
And that’s great news for the workers, but also the people who live in those states or municipalities, right? I mean, they too will benefit if things are kept on the straight and narrow. Chris, you know, there’s always a tendency for our lawmakers maybe to kind of go in different directions.
They go through elections. They have to be, you know, they consider alternative changes. But really, does it make sense to really, you indicated that maybe the funding levels aren’t where they were in 2008.
But it really makes sense. I don’t want to get in front of you, but it makes sense to really kind of keep the status quo, keep things going as they are.
Chris McIsaac, R Street Institute
Yeah, that’s right. I mean, what we’re seeing, and I think this is a pretty significant risk to the health of the funds moving forward, is that we’re starting to see lawmakers revisit some of those important reforms that were enacted in that, you know, 2010-2012 time period and actually looking to roll back some of the reforms that were put in place. So to give you a concrete example, the state of California in 2012 approved a reform that established a new benefit tier for all public workers that were hired starting in 2013.
And that was going to have the effect projected at the time to save the state about $40 billion over the life of the reform. And there’s actually a bill, and to go back to what the reform did, it essentially created a new benefit tier that would require public workers to work a little bit longer before they could get their benefit, contribute a little bit more into their fund. And what we’re seeing is legislation at the state capitol that would roll back some of those changes and actually kind of put the employees back into the type of benefits that were in place before 2012.
So I think that is the wrong way to go, and I think is a concerning trend because in order for these reforms to really have their full impact, they need to be kept in place for the foreseeable future.
Jeffrey Snyder, Broadcast Retirement Network
Yeah. And is there a revisitation or a potential revisitation? Is it political?
I mean, look, everything’s political, but I mean, are there different groups exerting pressure on these lawmakers to say, okay, 80% is good enough. I would argue 100% is better. That’s just Jeff Snyder’s opinion.
But is there like this political pressure to kind of unwind these things? Because a lot of times these workers have advocates that want to give them more maybe, and the timing isn’t right.
Chris McIsaac, R Street Institute
Yeah, absolutely. I mean, these proposals are certainly coming from the employee groups. And I think an important thing to keep in mind about the structure of the reforms from 2012, 2013, as I mentioned, is that they were prospective, meaning that they only impacted future government workers.
And so what that meant is that at the beginning of the time period when these reforms were in place, there were very few workers who were subject to the reformed benefits. That has now grown. So according to CalPERS in the California example, about 30% of the workforce now is in this PEPRA benefit tier, and that’s projected to grow to 90% over the next decade.
So this is becoming a larger constituency of workers who are going to have greater influence with politicians in order to ask them to revise some of the benefits that they’re earning.
Jeffrey Snyder, Broadcast Retirement Network
So I have to imagine, I mean, you’re a voice, you have a great organization. Are there others that have voiced concern about rolling things back? Again, I don’t think we want to, my personal opinion is I don’t think we want to go back to 2008 or 2007.
We want to make sure that these are important benefits. You want to be able to guarantee them for the foreseeable future. Therefore, you need fiscal responsibility.
But there must be others either inside the states or outside that are voicing similar concerns that you’re raising.
Chris McIsaac, R Street Institute
Yeah, I think one of the primary areas of pushback that you’ll see on any of these attempts to roll back the benefit reforms are going to come from, in many cases, local governments, because they’re the ones who are on the hook from a budgeting perspective to pay for any increased costs associated with these changes, and even more importantly, pay for any of the associated costs with the next economic downturn or recession that’s going to necessarily require some additional taxpayer contributions.
So I think they, by and large, recognize the risk of going back to some of these earlier benefit designs that we’ve moved away from, at least in part, over the past 10, 15 years.
Jeffrey Snyder, Broadcast Retirement Network
And let’s talk about the, it sounds like there’s some education needed for the citizen, the voter, whatever, however you want to term it, the citizens of each state, maybe to be a little bit more aware of what this means. I mean, look, we’re, no offense to you, but we’re pension geeks, we’re retirement geeks, we’re heavily into this space, but people have their lives, and this is maybe one small component of their day-to-day lives. So it seemed to me that there’s a lot more education needed in terms of what these bills actually mean.
Chris McIsaac, R Street Institute
Yeah, I think that’s absolutely right. And I would even say for the public, of course, if we can get them to pay attention, that would be great, but even lawmakers, 15 years is a long time in terms of turnover in state capitals. So you can’t really blame necessarily some of these legislators for entertaining these proposals because they probably were not in office in the 2010 time period when some of the reforms were put in place.
So I think there’s an education of elected officials that needs to be ongoing in order to make sure that people have the full context of what these reforms would do, what they might be undoing before they’re put in a position of having to vote up or down on these proposals.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, look, if they’re 30 years old now, they were 15. I mean, just to put it in the context, and that history is important. If you don’t know the history, you’re maybe doing the repeat some of the failures.
Chris, we’re going to have to leave it there. It was an excellent article. I think people like you are street advocating, providing good information.
This is what it takes to improve pension plans, improve retirement benefits. Thanks for joining us. And look, we look forward to having you back on the program again very soon.
Thanks so much for having me.
