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What are the Consequences of Funding Problems?

The best point in time in history for teacher pensions was the turn of the century. In 2001, America’s guaranteed income plans for teachers and educators were 99% funded. There was around $12 billion in pension debt spread across the 60 different plans managed by states, cities, and counties for public school employees—a relatively manageable amount.

Since then, the funded ratio for teacher plans as a whole has gotten steadily lower, and the size of unfunded liabilities has grown steadily higher. This chart shows that change over the last two decades.

Increase in Unfunded Liabilities for Pension Plans Covering Teachers

Source: Equable

Teacher pension debt has grown from virtually nothing to around $700 billion. When we add in the pension systems for non-education—state agency workers, public safety officials, municipal employees, etc.—the total amount of unfunded liabilities in 2018 was around $1.6 trillion.

This chart shows the declining funded ratio for the same teacher pension systems over the same period of time.

Decline in the Average Funded Ratio for Pension Plans Covering Teachers

Source: Equable

Both of these charts are based on the numbers reported by the teacher pension systems in annual financial reports, so their accuracy depends on each state and municipal pension plan’s financial experts and actuaries accurately measuring the size of benefits promised. The total amount of pension debt may actually be higher than the most recent figures reported.

There are many reasons for the current spike in debt, all related to the various risks that pension funds face:

  • Some states didn’t pay their bills. Any state that avoided paying the full ADC contributed to long-term pension debt.
  • Most states have had investments perform lower than their assumed rates of return over the past two decades. It’s been hard to earn high returns, so it might not be the fault of investment managers—the investment return target used to determine contribution rates has simply been too high.
  • The financial crisis certainly didn’t help. Average investment returns in 2008 and 2009 were around -10%, which required very strong recovery years to bounce back from. Average returns in 2010 and 2011 were around 14%.
  • Retirees have lived longer than originally expected.
  • Pension plans have matured, making it harder to meet assumed investment returns in the face of growing debt.

These problems have consequences, some of which are very real for teachers today.