State Pension Plans on the Rebound

State-run pension plans for teachers, police and other state and local workers have made important progress toward restored financial health without breaking state budgets, according to a new study by one of the premier research organizations in this field.

That suggests that the more drastic kinds of changes that some have proposed for those pension funds, like converting them to 401(k)-style plans that would put retirees largely at the mercy of the stock market’s ups and downs, won’t be necessary.

The Boston College Center for Retirement Research sampled 32 of the nation’s largest state pension funds (in 15 states) and looked at how their prospects have changed since 2008.

Investment losses hit these pension funds hard in 2008, when the stock market fell sharply.  But the stock market has since recovered, and most states have enacted changes to their pension plans, mostly through modest benefit cuts and increases in employee contributions.  In fact, only three of the 32 plans in the BC study have done nothing to lower their long-term obligations.

Those fixes seem to be working.  The BC study found that three decades from now, when pension funds feel the full impact of the recent reforms, many states will likely spend a smaller share of their budgets on pensions than before the 2008 stock market decline.

The BC researchers recommend taking these results with some caution.  The study assumes that pension funds will continue to get the kinds of returns on their investments that they’ve historically received, that states will stick with the reforms that they’ve enacted, and that states will make full contributions to the funds (something they didn’t always do during the worst of the recent fiscal crisis).  Further, the study doesn’t look at every state.

But the study confirms what we and many other analysts have long argued.  For most states, modest reforms rather than radical overhaul is the appropriate path to long-term solvency.