Sunday, January 27, 2019

Can Public Pensions Survive the Next Recession?

Even before the recent dip, many state pension plans were struggling to get back to where they were before the last recession.

If a decade of positive investment returns can't fix what's wrong with America's public pension systems, how much worse could things get in the event of another downturn? That's what Greg Mennis, Susan Banta, and David Draine, three researchers at the Harvard Kennedy School, set out to determine.

They subjected state pension plans to a series of stress tests meant to simulate the consequences of a variety of adverse economic climates over the next two decades, including everything from another major recession to merely lower-than-expected investment growth.

Deeply indebted pension plans in places such as Kentucky and New Jersey face insolvency if annual returns average 5 percent for the foreseeable future rather than the higher rates the plans assume.

If a major downturn does come, states such as Colorado, Ohio, and Pennsylvania-which are closer to the national average in terms of how well-funded their pensions are-could require "Contributions that may be unaffordable" to avoid insolvency.

One of the only states that seems ready to survive fiscal troubles is Wisconsin, where the combination of low existing debt and a 401(k)-style defined benefit plan means unexpected costs would be manageable and shared between employees and taxpayers.

Connecticut, Hawaii, New Jersey, and Virginia have passed legislation or adopted policy changes mandating annual stress-testing of public pension plans, while California and Washington have created informal guidelines establishing similar processes.

http://reason.com/archives/2019/01/26/can-public-pensions-survive-th

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