All Aboard the Pension Transparency Express

“A lack of transparency results in distrust and a deep sense of insecurity.”

-- The Dalai Lama, 2012

Last month, a Blue Ribbon panel commissioned by the Society of Actuaries issued a report on public pension funding in the United States. The results were sobering. The study found that “the financial condition of public pension trusts has weakened during the last 15 years, while its exposure to future financial and other risks has increased.” More troubling, it concluded that public pension funds are opaque, consistently failing to provide adequate data concerning future liabilities.

As a result, one of the major recommendations is to have pension actuaries provide plan boards of trustees and the public with the fair value of pension obligations and estimates of the annual taxpayer contributions needed to cover them.

Pension funds have long resisted such calculations, instead preferring traditional actuarial estimates, which, as the New York Times described, are “smoothed, stretched, averaged, backloaded and otherwise spread across time.” Indeed, the unions whose members benefit from such plans (disclosure: I am a member of one such plan—the New York City Employees Retirement System) fear that such transparency will “be used to cast public pensions in the worst possible light to whip up fervor against them and justify the termination of the plans.”

While that is a reasonable fear given the ubiquity of pension naysayers intent on gutting defined benefit pensions regardless of the consequences, the true risks to the future of such pensions are (a) failing to grapple with gap between assets and liabilities—which some estimates suggest have risen to over $4 trillion from $3.1 trillion in 2009 (Massachusetts has a $63 billion shortfall according to Moody’s (see map), and $89 billion according to State Budget Solutions)—and (b) losing the confidence of the public by failing to be transparent about pension management.

That fate appears to have already befallen the board of the Massachusetts Bay Transportation Authority (MBTA) pension fund, which, because it was organized as a private entity rather than as a public pension fund, is not legally required to hold open board meetings or respond to public requests for information. Thus, despite the fact that taxpayers fund the MBTA trust to the tune of $55 million a year, they are largely left in the dark not only about the trust’s funded ratio (its assets compared to liabilities), but also the investments made by the fund.

Indeed, as the Boston Globe reported, the MBTA fund recently lost $25 million in an investment in a bogus hedge fund—an investment pitched by a former MBTA Executive Director. This relationship was not disclosed publicly by the pension fund.

In politics, when individuals or institutions try to hide the proverbial ball, it only attracts greater scrutiny and more distrust (as the Dalai Lama wisely pointed out). Thus, the way to defend public pension funds or other policies must never be to shy away from their pitfalls, but to confront them head on—and in so doing, treat citizens as adults capable of making rational judgments about the costs and benefits of various government programs.

For far too long, our leaders have blithely asserted that we can have something for nothing. And We the People, to our shame, have not only accepted these offerings, but also demanded them.

In the context of public pensions, instead of sharing in the burden of their cost, states and cities across the country have systematically shifted the burden onto the next generation of government workers, chipping away at our children’s benefits in an effort to save our own. This phenomenon is not limited to pensions. Rather, it infects every part of our public life—from the idea that we can somehow maintain our roads and bridges without raising the gas tax for 20 years to the belief that we can allow a brave minority of our contemporaries to fight and die in foreign wars while giving ourselves huge tax cuts here at home.

Transparency may not solve all these problems. But by shining a light on the true effect of our choices, maybe, just maybe, we’ll look in the mirror and decide we don’t quite like what we see.

Tax Time, Part IV: Retirement Security for the 21st Century

“Properly integrated, they may be looked upon as a three-legged stool affording solid and well-rounded protection for the citizen.”

-- Reinhard A. Hohaus, actuary, Metropolitan Life Insurance Company, 1949

Last year, the National Institute for Retirement Savings released a report showing that the average working household has virtually no retirement savings. In fact, as shown in the chart below, NIRS found that the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.

There are many reasons why this crisis has come to past, but one of them has been the steady erosion of the “third leg” of the American retirement stool: the defined-benefit pension. In 1975, there were 2.4 participants in defined benefit pension plans for every one participant in a defined contribution plan (Department of Labor, 2007). However, by 2011, Treasury Department data showed that out of $11.2 trillion of private pension assets, only 21 percent were maintained in defined benefit plans, with the remainder held in defined contribution plans (36 percent) and IRAs (43 percent).

However, the decline in DB pensions—while of great concern to many on the political Left—is not the only contributor to America’s retirement problem. A major reason for the lack of savings is the fact that many American families do not earn sufficient wages in the first place to set aside money for retirement, particularly with stagnant wage growth over the last 20 years.

Furthermore, our tax code also does working-class Americans few favors. Let’s take a closer look at the code and what can be done to boost security for working class Americans.

Last year, the Center for Budget and Policy Priorities found that nearly 2/3 of the benefits of the retirement tax incentives went to the top 1/5 of U.S. income earners (see chart, left).

Despite noble and consistent efforts by federal, state, and local governments to boost financial literacy and encourage individuals to open retirement accounts, low-income Americans who have retirement accounts continue to be the exception rather than the rule. Indeed, as of 2010, only 1 in 9 Americans in the bottom 1/5 of income had a retirement account, while nearly 8 in 9 at the top 1/5 had such an account.

While far from a panacea for the retirement security crisis, universal savings plans offer an elegant solution. Legislators on both sides of the political spectrum have long embraced these plans.

In 2006, Senators Rick Santorum (R-PA), Jon Corzine (D-NJ), Chuck Schumer (D-NY), and Jim DeMint (R-SC) proposed the ASPIRE Act, which would have would have automatically opened a KIDS Account for every child assigned a Social Security number. The account would be funded with a one-time $500 contribution, and children in households earning below national median income would be eligible for up to an additional $500.

In a similar vein, Senator Jeff Sessions (R-AL) proposed PLUS Accounts that would be automatically opened for citizens born after 12/31/07 and funded with a one-time $1,000 contribution. The PLUS program would have later expanded to all U.S. citizens under the age of 65 and included mandatory, pre-tax contributions of 1% of each worker’s income (the worker could choose to contribute up to 10%). Under the Session plan, employers would also be required to contribute at least 1% (and up to 10%) of earnings.

While the Tea Party has made such automatic savings/retirement accounts anathema to many in the GOP, these universal, automatic plans continue to be one of our best hopes for helping boost retirement savings for all Americans—particularly those at the bottom end of the income scale. Indeed, according to the Brookings Institution, these types of automatic savings systems “have proven remarkably effective in raising 401(k) participation rates,” particularly for populations that are traditionally vulnerable to retirement insecurity, including women, Hispanics, and low-income Americans (see chart, below).

In addition, Congress must make the “Saver’s Credit” refundable to encourage additional savings by lower-income families. The credit provides a tax credit of up to $1,000 (up to $2,000 if filing jointly) on eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA. However, because it is non-refundable, it provides no incentive for nearly 50 million households that have no income tax liability.

Lastly, we need to change our eligibility rules for public benefits so that low-income Americans should not be needlessly penalized for making smart decisions to plan for retirement. For instance, in New York, the asset cap for Temporary Assistance for Needy Families (TANF) does not exclude retirement savings.

By creating new carrots to nudge low-income families to save when possible and eliminating needlessly cruel sticks that penalize these families for prudent financial planning, we can work to build new legs of a retirement stool for the 21^st century.