Overcoming Fear! – Part 2

Gary Findlay, former Executive Director of the Missouri State Employees Retirement System (MOSERS), discusses fearmongering regarding public pension plans.

President Andrew Shepherd, in the film “The American President,” addressed the White House press corps and, among other things, offered the following about Senator Rumson, his likely opponent in the upcoming presidential election:

“And whatever your particular problem is, I promise you Bob Rumson is not the least bit interested in solving it. He is interested in two things and two things only: making you afraid of it, and telling you who’s to blame for it. That, ladies and gentlemen, is how you win elections.”

Unfortunately, fearmongering extends well beyond the election process. Over the last few years in particular, we have seen volumes of criticism leveled at public employee defined benefit (DB) retirement plans, with much of it being of the fearmongering variety. Given the general recognition that a retirement income security crisis is unfolding in the private sector, it seems a little odd that there appears to be considerable interest in undermining traditional public sector retirement plans and relegating public employees to the same unfortunate fate confronting an increasing segment of the private sector. I think this can be attributed to one of the fears I mentioned in Overcoming Fear! – Part 1. Specifically, “Defined benefit plan critics fear economic recovery will occur before they have a chance to put the last nail in the coffin of such plans.”

A recent favorite from the public defined benefit critics has been the observation that some public pension plans pay out more in benefits than they receive in contributions and then characterizing that as a red flag. The fact is, for a perfectly funded, mature defined benefit pension plan, that will be the common condition. You would never collect more than you need to pay out if you didn’t plan on paying more than you collect. The alternative would be the pay-as-you-go approach to funding where you collect in contributions exactly what is needed to meet pension payroll and have no income from investments—the $3 trillion-plus in reserve assets held by public defined benefit plans, and generating billions of dollars in plan revenue, did not come from the benefit fairy. The reason I have to believe this so-called “negative cash flow” criticism is nothing but fearmongering is that I also have to believe those economists who are leveling the charges actually know better—to think they don’t would suggest that they haven’t thought this through, and that’s just too scary.

So why have the critics resorted to fear tactics? Possibly because it’s easy—after all, making you afraid of an issue and telling you who’s to blame for it seems to work in many situations. Another possibility is that providing comprehensive, accurate information does not make a persuasive case for doing away with public sector defined benefit plans. As mentioned, there does seem to be a general consensus that, as a nation, we are headed for a retirement income security crisis, which highlights the failure of 401(k) plans to deliver even a subsistence level of income for private sector retirees. Given that reality, it begs the question as to why anyone would propose that equity should be achieved by eliminating the plans that, with limited high-profile exceptions, are efficiently and effectively delivering reasonable, yet modest, levels of life income to public sector retirees. Promoting a race to the bottom just does not make any sense.

Other Non Sequiturs from Public DB Plan Critics

Hardly a day goes by when I don’t see an anti-public-DB-plan article in a trade publication or blog. Many of the claims, however, do not stand up to thoughtful scrutiny. A couple of examples follow:

They claim that liabilities for defined benefit plans should be determined using a risk-free discount rate. The implication here is that plan administrative boards should be in the risk elimination business rather than the risk management business because of the guaranteed nature of the payout. Applying their logic to the financial world at large would produce results no more unrealistic than what they are suggesting for pensions. For examples, banks should have cash on hand equal to the value of their demand deposit—i.e., checking—accounts; insurance companies should have cash reserves equal to the payout that would occur if all potential claims came due immediately; and home mortgages should be marked to market at least annually, requiring the borrower to make an immediate deposit if there has been any decline in the market value of the property.

When it comes to 401(k) account investing, plan participants should then be allowed only to invest in risk-free investments to ensure they will not come up short if there is a market decline just before their retirement. To ensure that they will not become a burden on society, they should be required to contribute amounts, assuming a risk-free return on their investments, that will guarantee they have adequate resources to sustain them during their retirement years. Something in the neighborhood of a 40% of payroll contribution rate to their 401(k) should suffice. As an aside, the focus here seems to be on the nominal discount rate.  A plan that has an inflation-related COLA [cost-of-living adjustment] for benefits and a discount rate of 8% with an assumed inflation rate of 4% may be more conservative than a 4% discount rate with an assumed inflation rate of 0%. The point is that you can’t just look at the nominal discount rate to assess whether or not the economic assumptions are aggressive or conservative.

Another example is the recent criticism of alternative investments—private equity, hedge funds and anything other than plain vanilla stocks and bonds. The fact is, there are investment products available today that can be used to further diversify portfolios and reduce risk, which were unavailable in the past. (If you’re concerned about risk, think about what happened to plain vanilla portfolios in 2008.) If we were generally to disregard the tools available today, investment professionals would still be developing their spreadsheets using Big Chief writing tablets and No. 2 pencils, and making their computations with an abacus. Ignoring the benefit of extreme data-mining techniques, critics of alternatives have come up with examples of underperformance. If the focus is selective and short-term enough, a case can be made against anything other than a can full of cash buried in the backyard.

There are a number of agendas in place today that have anti-government or anti-public-education initiatives at their root. Rather than approach them head on, critics have found common ground by opposing retirement income security for government workers. It would be refreshing if they just fessed up and said, “Look, we don’t like government intervention in our affairs and will do whatever it takes to make government as ineffective as possible. As a starting point, we need to ensure that public sector employers do not have the total compensation arrangements required to attract and retain quality employees.” Perhaps if there were agreement on the real issue, it would be possible to direct attention to retirement income security for the masses, regardless of whether they are public sector or private sector. The current thrust for both has disaster written all over it.

I find that, with age, I am becoming less and less certain about more and more, but there is one thing I feel quite comfortable in saying. Specifically, the solution to the imminent retirement income security dilemma in the United States will not emerge through fearmongering despite its prominence in national and global politics of late.


Gary Findlay retired in January after 21 years as Executive Director of the Missouri State Employees Retirement System (MOSERS) and a total of 42 years of professional experience in the field of public employee retirement.  

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International or its affiliates.