Massachusetts has made some expensive promises over the years. Chief among them, a commitment to provide retirement pensions for teachers, State Police, and other public workers.
As of now, we don’t have enough money to cover all these pension promises. Every dollar we owe is backed by roughly 60 cents of assets. That’s not terrible — some states are in far worse shape — but it’s not sustainable either.
To ensure that we fill our pension coffers by 2040, the state has embraced an actuarially sound plan, built on a mix of investment strategies, increased contributions, and regular adjustments.
Which is good, except for one thing. It’s not clear how long we’ll be able to follow that plan.
Here’s one problem: There’s no free lunch when it comes to pensions. For the state to meet its long-term obligations, lawmakers have to set aside more money. Every year, in every budget, until we’ve made up the funding gap.
Officially at least, they’ve committed to doing so. But their whole approach is back-loaded, so that the really big contributions are put off for another day. This fiscal year, the state set aside $2.4 billion for pension contributions, which is already 6 percent of total state spending. In 2027, they’re expected to allocate $5.2 billion; by 2036, it’s $11.2 billion.
Even adjusting for inflation — and the fact that Massachusetts will probably be a lot richer in 2036 than it is today — that’s still a massive increase. And it means that when today’s college students become our future representatives, pension contributions could be siphoning tax dollars away from things like schools or health care.
And that’s if the money we put aside continues to earn decent investment returns. Otherwise, even these fast-growing and budget-squeezing state contributions won’t be enough.
The magic number holding everything together in our current pension funding plan is 7.5 percent. That’s the annual rate of return we’re expecting to get on our savings.
It’s not an unreasonable assumption; in fact, state pension investments have done better than that on average since the mid-1980s. But there’s no guarantee we can hit 7.5 percent on a consistent basis. And if investments fall short, we’d need even bigger contributions from taxpayers.
Note, too, that all this is just for state-run pensions. Lots of cities and towns run their own plans for municipal workers, some of them in worse shape than others. Also, there is the MBTA, which has roughly $1 billion in uncovered pension obligations and doesn’t participate in the state system.
But despite all these issues, there is one big reason not to get too worked up about the exact size of our unfunded pension liabilities. A lot of this is really just guesswork.
Which is not a critique of the folks who oversee the Commonwealth’s pension systems. No doubt they do their scrupulous best using the most reliable information available.
But there’s much about the 2030s (and beyond) that we just can’t know. Like, how long people will live, how the stock market will perform, or how deep the next recession will be. Sure, we can look to the past for guidance, but that only gets you so far.
What if we’re at the cusp of a breakthrough cancer treatment. That would be great for humanity but terrible for pension plans, because it could keep retirees alive a lot longer.
Or consider something more humdrum: inflation. Right now, there’s a battle in economics over whether the Federal Reserve should maintain its 2 percent inflation target or aim for something closer to 4 percent.
If the 4 percenters win the day, it would dramatically reduce the cost of state pension obligations — albeit by leaving recipients with less-valuable checks (since state pensions aren’t fully adjusted for inflation.)
Of course, just because forecasting is hard doesn’t mean we should ignore our state’s pension funding shortfall. Under nearly any scenario, additional money will be needed if Massachusetts is to fulfill its promises.
But given the uncertainty, perhaps it makes sense to focus less on the accounting details and more on the institutions and processes designed to keep us on track — like PERAC, which monitors the health of public pension systems around the state, and the state law requiring our government to reassess needs every three years.
For now, these sorts of arrangements seem to be working. Finance experts are developing detailed assessments, and lawmakers are heeding their conclusions. But the real test will come in the years ahead, when required contributions rise and cloudier economic times make it tempting to divert that money for more urgent needs.Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz.