Byron Schlomach

Let's Stop Making Promises We Can't Keep

Posted on December 11, 2012 | Author: Byron Schlomach
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In 2000, Arizona’s pension funds were considered some of the healthiest in the nation. Just over a decade later, Arizona now has the dubious distinction of seeing the third worst decline in its pension fund health among the states from 2000 to 2009. For too long, policymakers and pension fund managers have assumed their investments would have endless high returns and little or no risk. The last decade and two recessions have proven otherwise, and Arizona’s retirement systems are on shaky ground.

The chart below illustrates the stark reality. On an average yearly basis, benefits paid out in the state’s four pension systems have increased much faster than inflation and population, GDP, or personal income growth. Contributions have risen even faster in all but one of the funds. Meanwhile, assets built up from past contributions and investment earnings have barely grown at all, with two of the funds seeing losses.

Source: Arizona pension plan Comprehensive Annual Financial Reports, author calculations

It may already be too late to avoid breaking promises to some retirees. After all, contributions to the pension systems have increased six times faster than the state’s GDP. But to minimize the pain, action must be taken sooner than later. As soon as possible, new public employees must receive their retirement benefits only as 401(k) contributions. By doing so, we will avoid creating even more obligations that we can’t meet and making promises we can’t keep.

Learn more:

Cato Institute: Funding Status, Asset Management, and a Look Ahead: State and Local Pension Funds

Goldwater Institute: Defusing the Pension Bomb: Making Retirement Plans Solvent for All Public Workers

Arizona Treasury: Arizona’s Pension Challenges: The Need for an Affordable, Secure, and Sustainable Retirement Plan

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