80 Percent Pension Funding Hall of Shame: Some Reporters and a Spreadsheet [UPDATED]
by meep
As promised in the first post on the 80% Pension Funding Hall of Shame, I had three stories in the hopper, and I will put all three in this post.
This will show what I usually see (and why this is only a Hall of Shame, and not a Circle of Hell): reporters passing on “conventional wisdom” about 80% funding being “healthy”, when we have no idea where this “conventional wisdom” originally came from.
First, from Bill Cotterell in the Tallahassee Democrat
Words like “unfunded liability” sound scary, but the FRS is not in any trouble. Actuaries consider anything above 80 percent to be a healthy funding ratio. It’s a little like your home mortgage — if you had to pay it off tomorrow, you might have a problem, but that’s not going to happen.
Now, there’s more than just the 80% issue that’s wrong there, but I don’t want to get into that right now.
I saw Mr. Cotterell had a contact email address at the bottom of the piece, so I emailed him this:
Hi —
I saw in your recent column this paragraph:
“Words like “unfunded liability” sound scary, but the FRS is not in any trouble. Actuaries consider anything above 80 percent to be a healthy funding ratio. It’s a little like your home mortgage — if you had to pay it off tomorrow, you might have a problem, but that’s not going to happen.”
This is not the case.
This is from the American Academy of Actuaries:
http://www.actuary.org/files/Pension%20Funding.pdfThe beginning:
“The health of defined-benefit pension plans is
a key issue to the tens of millions of Americans
who are receiving or expecting to collect
pension benefits. Some have said that the
level of funding – specifically an 80% funded
level – should be used as a general benchmark
to determine whether pension plans
are financially healthy. In reality, however, no
single level of funding distinguishes a healthy
plan from an unhealthy plan. In fact, plans
should have as their objective accumulating
assets equal to 100% of relevant pension
obligations.”Thanks for your time,
-mpc
This is going to be my normal email sent to all reporters from now on, even if they’re quoting somebody else.
I will not necessarily be digging up old articles to contact reporters about, but I will notify when the pieces are still fresh (i.e., less than a week old).
Mr. Cotterell made a nice response – as I suspected, this was just a random piece of “conventional wisdom” he had picked up somewhere, and he doesn’t remember where or how.
UPDATED: This was his response:
Thank you. I’d never heard that. Over the years, I’ve often been told 80 percent was the standard. Our State Board of Administration [in Florida] has expressed satisfaction with it many times.
But I’m glad to know that’s not the standard of the actuaries.
My response to his response:
Glad to be of help.
As Girard Miller noted, we can’t figure out who came up with this rule of thumb:
http://www.governing.com/columns/public-money/col-pension-puffery.html#ht4..because it’s not tied to any reality.
I’m guessing some politician came up with this “everybody knows” mark, and then decided to pin it on actuaries out of expediency.
I do keep the piece in the Hall of Shame, because I have started a record of all these pieces. Other than keeping track for my own purposes, I’m not sure what I’m going to do with this. Perhaps send it to the American Academy of Actuaries once a year, so they can see the state of play.
If you went to look at my recording of the Hall of Shame, you will see two more entries, so here they are.
Paul Hammel, World-Herald Bureau Reporter
Currently, Omaha has the two pension plans with the lowest funding ratios in the state, 54 percent for the civilian plan and 49 percent for the police/fire pension plan. Eighty percent is seen as a minimum benchmark for a healthy plan.
and Lloyd Dunkelberger, Herald-Tribune Reporter
Opponents of pension change say Florida has a healthy fund – exceeding the 80 percent mark that most public pension funds are measured against. They also contend if more future workers opt out of the traditional pension fund, their absence will increase the unfunded liability.
Note that Dunkelberger is commenting on the same pension reform attempts Cottrell was, and in this case, he’s attributing the opinion to opponents of the reform. Fair enough.
If you look at the comment areas on both, you will see that I posted the following comment:
Just as an FYI: 80% funded does not mean a pension plan is “healthy”
See this brief from the American Academy of Actuaries:
http://www.actuary.org/files/Pension%20Funding.pdf
So you may be seeing more of those around the internet.
As noted before, I have a google news alert set up on the terms “80 percent pension”, which should pick up most of the stories I’m looking for in the Hall of Shame.
I have no doubt my Hall of Shame database will fill up in no time.
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