A Big Myth Persists: Defining Away Part of the Pension Crisis – WP Original

By: Mark Glennon*

Look, maybe it would be reasonable to argue that solving only part of our pension crisis is the best we can possibly do.

But it’s another thing entirely to start the discussion simply by defining away a large percentage of the problem. Unbelievably, that’s routine.

The latest culprit is an important reporter, Karen Pierog, who covers pensions for Reuters. Her columns are widely reprinted. Yesterday, in an article about the portion of an Illinois pension’s liability that’s funded, she said it’s “still far below the 80 percent level considered healthy.”

No, 80% is not considered healthy. That’s an often-repeated myth propagated by politicians who want to cover up the mess they made and sloppy, uncritical reporters.

The American Academy of Actuaries says just that — the 80% funding standard is a “myth.” It’s not complicated. You don’t need to be an actuary to understand this. Pensions either have what they need or they don’t. That’s why 100% funding is the measurement for a healthy pension, the Academy says (though actuaries and accountants in practice don’t follow that).

Ninety percent isn’t enough, either. You either have enough gas to make it home or you don’t. And that’s where actuaries and accountants, in practice, play tricks, among other places. Virtually all calculations of the “ARC” target only a 90% funding level. It’s now common to compare what a government is paying into its pensions to the ARC — the Actuarially Required Contribution. For example, you now sometimes see it reported that Chicago has been funding only about 1/4 of the required ARC. But that, too, actually understates the shortfall because even paying 100% of the ARC wouldn’t clean up the problem.

Politicians, reporters, accountants and actuaries are simply defining away part of the problem.

They commit this sin almost universally. Even the Better Government Association made this error. It’s one reason why former Illinois Governor Jim Edgar is in the “Hall of Shame” kept by Mary Pat Campbell, an honest actuary who writes about pensions. All financial reporting for state and local pensions in Illinois, when they include an ARC, use a 90% target.

Why does this matter, since Illinois’ pensions are only about 40% funded — half of even the mythical target?

Because this trick is just one of many used, together, to grossly understate the scope of our pension crisis. An honest actuary who I talk to often, Mitch Serota, has an ongoing debate with me. I say pensions are like peeling a rotten onion — each layer reeks with its distinct stench. He says, no, it’s Whac-a-Mole. Whatever. You get the point. Whether it’s outdated mortality tables, silly investment return expectations, ignored healthcare liabilities, the target funding level or any of many other assumptions that go into pension accounting, the numbers get manipulated.

Solving our pension crisis requires, first, an honest, agreed measurement of how big a problem we face. Uncritical reporting of perverted numbers isn’t getting us there.

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.