Concern is growing across the country that pension funds are dangerously underfunded. How do Moody’s and other credit agencies assess pension funds to determined if they have adequate funding to meet their obligations?
Pensions funds with an 80% funding ratio are described as healthy, but the American Academy of Actuaries disputes that standard. The GAO uses the 80% standard as the limit to what unions, public sector experts, and advocates view as a healthy funding for a pension system. It is frequently quoted by experts discussing planning and financial strategy and has over time become the defacto standard for assessing a plan’s financial health.
The Academy of Actuaries, however, has several concerns with this standard being accepted as a metric of financial health. They believe that while funding levels at various times can change, the goal for funding a pension fund should always be 100% funding, and planning should reflect that goal.
The Pension Protection Act of 2006 used the 80% funding metric for the level under which multiemployer plans need to enact stricter funding rules. Over time, and with common usage, the 80% funded metric has moved from the minimum level, under which restrictions are needed, to the goal and measure of financial health.
Sustainability, 100% funding, and the flexibility to react to financial change should be criteria for evaluating a pension plan. If we study what happened to Greece, a combination of unwieldy and restrictive bureaucracy, underfunded pension plans, and an aging population, among other factors, led to financial meltdown. In order for the IMF to assist in recovery, they demanded pensions be cut. In 2012, the Economist reported that 17.5% of Greece’s GDP went to fund pensions, and that was estimated to increase to 25% by 2025. The size of the aging population may be more of an issue than is commonly understood, and one that America shares. After multiple cuts to pension benefits and hikes to health insurance premiums, 45% of Greeks living on their pensions are living below the poverty line.
Attorney Jake Posey noted that public pensions in this country, for city, state, and federal employees, are facing massive shortfalls. The Dallas Police and Fire Pension Fund, which is rapidly devolving into a default, is 45% funded. A vote is scheduled on pension cuts.