Unfunded Pension Liabilities a Benefits Problem, Not Just a Funding Problem

Source: Wirepoints, based on Pew Charitable Trust

In the analysis of unfunded state pension liabilities, there are two main components: assets and liabilities. Here in Virginia, most attention is focused on the asset side of the equation — how much money have state and local governments set aside to pay for retiree benefits, and how well is the Virginia Retirement System managing the pension portfolio? Less attention is given to the benefit side — how rapidly are the liabilities increasing?

Wirepoints, a group that provides research and commentary on Illinois’ economy and government, has published a research paper arguing that the Prairie State’s massive pension liabilities are not the result of insufficient funding — asset growth has increased at an annualized rate of 5.9% from 2003 to 2015 — but of runaway increases in pension benefits of 7.5% annually. The difference: a 2.6% gap.

Many other states, including Virginia, have experienced the same problem of mismatched growth rates for assets and liabilities, though not to the same degree. Over the same 12-year period, Virginia’s pension benefits increased at a compounded annual rate of 6.3% while its assets increased by 4.2% annually. The difference: a 2.1% gap.

A few years ago, the increase in pension liabilities became a concern. Under pension reforms enacted during the McDonnell administration, state employees hired in 2014 or after were enrolled in hybrid pension plans, which combine a defined benefit plan with a defined contribution plan and an option for voluntary contributions. In essence the new package shifted some risk for funding retirement benefits from the state to the employees.

Thanks to the bull market in equities, Virginia’s asset performance has been stronger the past few years, and presumably the shift to a hybrid pension system has dampened the growth rate in pension benefits (and will continue to do so over time). Wirepoints’ numbers, based upon Pew Charitable Trusts data, goes only to 2015. More recent numbers might show more favorable trend lines.

Bacon’s bottom line: Growth in pension liabilities is one of the Virginia Retirement System metrics we should be watching. The onus for ensuring that the Commonwealth meets its pension obligations should not fall solely upon taxpayers and VRS portfolio managers. The state needs to keep pension costs under control, too. Legislators should check periodically to see if the hybrid pension plan is working as advertised.

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11 responses to “Unfunded Pension Liabilities a Benefits Problem, Not Just a Funding Problem”

  1. LarrytheG Avatar

    re: ” runaway increases in pension benefits”

    I must have missed something. I thought that the amount of payout (benefits) was a known calculable number that played a role in the state (or other entity) determining how adequate the state/individual contributions combined with ROI were in assessing the overall health ( percent of funding/unfunded liabilities).

    So how does the benefit number… vary from original calculations if benefits are determined by how much is put in plus ROI?

  2. Steve Haner Avatar
    Steve Haner

    I didn’t see the original Pew information but I suspect Virginia’s leaders are very aware of this situation and this is why VRS has changed and is moving toward defined contribution.

    Even the calculation for the cost of living adjustment has changed for people under the newer version of the plan, with people under the original defined benefit plan getting a slightly higher adjustment (goes into effect with the next payment.) I remember when Virginia went to a straight 50-30 rule, meaning a full pension check at age 50 if you had 30 years of service. My father got a VRS check based on only five years in a covered local government job. There are/were enhanced benefits for law enforcement and judges. It was a very generous system and the transition away from it in recent years may have encouraged people to go ahead, retire and claim benefits.

  3. S. E. Warwick Avatar
    S. E. Warwick

    Defined benefit pension plans are dinosaurs that, like dinosaurs, must become extinct to prevent governments at all levels from being overwhelmed by pension debt. Few politicians, however, seem to have to stomach for eradicating them but prefer the old “kick the can down the road” strategy for someone else to worry about.

  4. Steve Haner Avatar
    Steve Haner


    Virginia is moving. It has not been an “eradication” but you can see the transition steps on this summary page. For the hybrid plan to produce a good retirement income the employee needs to make the full contributions and draw down the match, which as previously noted few are yet doing.

  5. TooManyTaxes Avatar

    WMATA, which calculates pension benefits based on overtime wages, has unfunded debt of $2.8 billion. Fairfax County has a payout that was 2.5 times the payout under the hybrid VRS plan as of 2016. And keep in mind that most of the new people moving to Fairfax County are in the lower portion of the economic spectrum.

  6. LarrytheG Avatar

    Some time ago – 1984 – the Feds moved to a 3 leg system – defined benefit, defined contributions with match and social security.

    I’d be curious to know if it has similar problems to the State pension systems or not.

    I suspect we have a much bigger problem with the Armed Forces benefits and pensions… which are quite generous and designed to attract recruits and keep them…

    I’m still not sure what the problem is. Is it that the pension fund folks are not accurately accounting for cost-of-living or that too many – like public safety folks are getting very rich pensions or something else? Is the problem beyond the ability of the pension fund managers to confront?

  7. LarrytheG Avatar

    In TMT’s link : ” MCA’s resolutions cited a 2012 study by the firm of Aon Hewitt, which found the county paid its retirees an average of $303,135, including the pre-Social Security supplement and cost-of-living increases”

    I’m trying to understand what this means. It surely does not mean that the average pension is 303,135 per year I hope so what is it?

    1. TooManyTaxes Avatar

      It’s the average payment per retiree from the person working the mail room to a department head. It covers the person who is retired for 25 years before passing away and the person who dies from a massive coronary six months into retirement. Big problems affecting Fairfax County is no other locality offers such generous pension plans; corporate earnings are lower now than in the past; more people are living 25 years of retirement than dropping dead soon after leaving the County’s employment; and economic growth in Fairfax County is very slow. Job growth is centered at lower-wage service jobs. Many middle class people leave the county when they retire and are being replaced by people making a lot less money at lower-wage service jobs. Sequestration hit the County hard.

      1. LarrytheG Avatar

        It’s the TOTAL amount paid to retirees on average?

        How does that compare to other govt pensions?

        if you divide that number by 10 – it comes out to 30K per year .. if you divide it by 25… it’s not much at all.

        Let’s say a guy gets a 40K pension from the govt for 20 years… that’s 800K…

        Problem we have here is isolated and unclear data.

        Would be good if we knew exactly what the 300K number represents – AND how it compares to other county, state govt pensions – BEFORE I’d conclude it’s “too rich” especially compared to other county or state pensions.

  8. alfredhorg Avatar

    If VRS assets have been growing by only 4.2% per year, then VRS needs better portfolio managers.

    Even some slob in a trash dump can do better than 4.2%:

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