While the market downturn that accompanied the Great Recession reduced the value of assets held by public pensions, it is hardly the crisis touted by some conservative critics. Unrealistic projections that inflate pension liabilities are stoking fears that future taxpayers will inherit large unfunded pension liabilities absent some sort of intervention. But the critique is based on the assumption that pension funds will earn a very low rate of return on pension assets. Accepting these alternative valuations could spur unnecessary drastic actions, from doubling contributions to pensions to scrapping them altogether in favor of 401(k) plans.
Public pensions now have an estimated $700 billion in unfunded liabilities (Lav and McNichol 2011). According to the Center for Retirement Research, public pensions last year had around 78% of what they needed set aside to pay for pension benefits (Munnell et al. 2010b). To make up the difference, state and local governments would have to devote about 5% of their budgets to pension contributions over the next 30 years, up from under 4% today, assuming an average 8% return on fund assets (Munnell et al. 2010b).1
This is a significant bump, but hardly untenable, especially for the majority of state and local governments that have kept up with their pension fund contributions. (The average funding ratio and required contribution cited above includes a few states like California, Illinois, and New Jersey that short-changed some or all of their pension funds over many years.) Nor is such an increase unprecedented: State pension contributions were around 6% before the long bull market that began in the mid-1980s (Munnell et al. 2010c).