July 20, 2019


What Crisis? The Case for Not Panicking Over Pension Debt.: New research released this week shows that even pension plans with big unfunded liabilities are likely to survive in the long term. (LIZ FARMER | JULY 19, 2019, Governing)

[A]ccording to research that debuted this week, lawmakers shouldn't worry too much about accumulating pension debt. "There's an assumption that fully funding pensions is the right thing to do," said the Brookings Institution's Louise Sheiner at the paper's presentation. "Most of the work in this area has been about calculating how unfunded these plans are [and] that's led to a lot of concern that these plans are in a huge crisis."

Sheiner, along with co-authors Byron F. Lutz of the Federal Reserve Board and Jamie Lenney of the Bank of England, say that's not the case. They argue that pension debt is stable as long as its size relative to the economy doesn't increase. "When you approach the pension situation from a public finance [and sustainability] angle," Sheiner said, "there's less of a crisis than is typically portrayed."

The paper, which was presented at the Brookings Institution's annual municipal finance conference in Washington, D.C., finds that pension benefit payments as a share of GDP are currently at their peak level and will remain there for the next two decades. That's because the 2008 market crash came at a time when pension plans were starting to see baby boomers retire, meaning they dropped in value just when payments to retirees were starting to increase.

By 2040, however, the reforms instituted by many plans following the financial crisis will gradually cause benefit cash flows to decline significantly. Since those changes were to current employees' plans, governments won't see the full effect of those savings until those workers retire.

All of this means that, according to the research, the worst of it is over for most pension plans. For the next 40 or so years, the ratio of pension debt as a share of the economy is expected to remain the same, as long as the plans achieve moderate investment returns and governments continue to make consistent payments equal to or slightly higher than they are now.

Posted by at July 20, 2019 6:48 AM