Forensic Analysis of Pension Funding: A Tool for Policymakers

Jean-Pierre Aubry

State and Local Pension Plans Briefs from Center for Retirement Research

Abstract: State and local policymakers face increasing pressure to manage pension costs, as unfunded liabilities continue to grow relative to budgets. However, policymakers often lack a historical perspective on the root causes of pension underfunding, which is an obstacle to developing effective solutions. In 2015, the Center for Retirement Research(CRR) performed its first forensic analysis of pension funding for the Connecticut State Employees Retirement System (CT SERS) and Teachers Retirement System (CT TRS). This analysis uncovered two major contributors to underfunding. The first was a legacy debt from the period before SERS and TRS were actuarially funded – retirement benefits had been promised since the 1930s, but were not actuarially pre-funded until the 1980s. The second was inadequate contributions made by the State once it decided to pre-fund, perhaps partly motivated by the sheer size of the legacy burden and its associated amortization payments. After the CRR released its forensic study, Connecticut adopted a new method that increased the cash flow to its plans. And the State began debating options for managing the system’s legacy debt. In short, the CRR study provided actionable insights to Connecticut policymakers. The analysis for Connecticut highlighted factors that likely play a role elsewhere as well. Therefore, to support the policy debate in more locations with poorly funded plans, the CRR performed forensic analyses for retirement systems in five other states: Illinois, Massachusetts, Ohio, Pennsylvania, and Rhode Island. This brief – the first of two – summarizes the results of these forensic analyses. The discussion proceeds as follows. The first section untangles the roots of unfunded pension liabilities and explains why the legacy debt from many decades ago continues to impact the finances of plans today. The second section quantifies the size of the legacy burden. The third section discusses how this burden may have encouraged questionable policies for managing later liabilities. The final section concludes that the lack of understanding of legacy debt is hindering progress on pension funding and that moving forward requires a new framework for managing these unfunded liabilities, which will be the topic of a second brief.

Pages: 7 pages
Date: 2022-04
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