PSERS – How bad is the under-funding?

In my last post in my PSERS series, I covered the basics of pension fund health.

Now that we have completed our review of pension fund basics, how is PSERS doing?   As of June 2013, the fund was 63.8% funded. Or, stated differently, assets are 36% below what is required to pay out all of the benefits that have been promised and earned by participants. In dollar terms, the unfunded liability is $32.6 billion as of June 30, 2013.

As a point of reference, the aggregate funding ratio of S&P 500 company pension plans was 89.5% as of June 2014.   And in the public sector, the funding ratio of all state plans in the US was 75% as of June 2013. So public sector pensions (using more aggressive accounting) are worse off than private sector pensions, and Pennsylvania is worse off than the average State.

How bad is this problem?   Let’s go back to our example of Anne in my earlier post. The current funding position is like Scenario 3: Anne needs 17 years of benefits to be paid, but only 9 years of funds are available.   If PSERS were to close its doors tomorrow and freeze every participant and pay the benefits that have been earned, members would only get 63% of what has been promised. (This cannot be done under current law, so this is purely hypothetical.)

Another way of looking at the size of the problem:  what would it take right now to fully fund PSERS?   Here are three different ways that would provide $32.6B to PSERS to fully fund the pension plan (for illustration purposes … not my suggestions!):

  • Each current working PSERS member makes a one-time payment of $127,000 into PSERS
  • Each PA school district makes a one-time payment of $62 million into PSERS
  • Each individual retiree, survivor annuitant, or disability retiree forgoes all benefits for the next 6 years

A final illustration of the poor health of the system … cash benefits paid out each year are more than twice the cash contributions coming in from existing workers.  Therefore, in order to pay benefits, the pension fund has to liquidate investments every year.  The actuaries note in the annual report that PSERS net cash outflow is twice as bad as the average US state pension.

What is even more discouraging is that this crisis was entirely avoidable.  Between 1997 and 2003, PSERS was over-funded, and at its peak was at 123.8%.  (See chart below, from PSERS 2013 annual report.)  Moreover, the pension fund is estimated to keep getting more and more underfunded until it starts to turn around in 2018.

PSERS funding ratio

It is aggravating to see mismanagement of the pension fund by our state government.  It is frustrating when a crisis occurs due to external factors beyond one’s control.  It is a whole different level of aggravation when the crisis is actually created through the actions of our lawmakers.   And unfortunately, this is largely the case with our PSERS crisis.

In my next post, we will look at the actions that brought this about.

Full PSERS 2013 annual report is here

My previous posts on PSERS:

  1. PSERS – An Emerging Problem
  2. What is PSERS
  3. PSERS – How are benefits earned?
  4. How is PSERS funded?
  5. How does pension valuation work?