February 19, 2016 Print

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Public pensions face insolvency throughout the United States, often because they promise to pay out guaranteed benefits rather than defined contributions, despite an uncertain fiscal future — as well as the standard government use of accounting methods that are designed to conceal real actuarial risk. Reason Foundation has been active in recent years making a solid public policy case for reform with its Pension Integrity Project, an effort that has helped bring pension reform to Arizona when, on Feb. 16, Gov. Doug Ducey signed into law a bill that overhauls the Arizona Public Safety Personnel Retirement System (PSPRS).

“Reason Foundation was a key player from the beginning of the process, with its Pension Integrity Project team providing education, policy options, and actuarial analysis for all stakeholders,” wrote Reason Foundation Director of Government Reform Leonard Gilroy, Pension Reform Project Senior Fellow Pete Constant, and Director of Economic Research Anthony Randazzo. “We also facilitated the development of consensus among stakeholders on the conceptual design and framework of the reform. Further, more than once we resorted to shuttle diplomacy to keep stakeholder parties at the table when negotiations became difficult or threatened to break down.”

They note that PSPRS is only 48 percent funded today, with $6.6 billion in unfunded liabilities that have accumulated during the past 12 years largely because a mechanism used to increase benefit payouts over time has been “skimming assets off the top of the fund in years of good market performance,” leading to even greater financial disaster during the years of underperformance.

Reason Foundation reports that it expects Arizona’s new pension reform law to have these positive effects, among others:

  • Government agencies will save between 20% and 43% on the normal cost of retirement for each new employee hired, relative to the status quo.
  • The reduction in cost for each new hire is estimated to save taxpayers $1.5 billion over the next 30 years, relative to the status quo.
  • The reform will reduce the future accrual of total PSPRS pension liabilities by at least 36%.
  • The reform will reduce the taxpayer’s exposure to future market risk by more than 50%.
  • The reform will reduce the volatility in employer contribution rates by more than 50%.
  • All new employees will equally share costs and investment risk with taxpayers under this reform.
  • The reform creates incentives for the revamped PSPRS board to set more responsible actuarial assumptions in a way that minimizes the negative effects of underperforming investment returns.

“Both the process and the content of the PSPRS reform offer models to other jurisdictions on how to approach meaningful pension reform,” Gilroy, Constant, and Randazzo conclude. “With regard to process, the Arizona PSPRS reform experience demonstrates that stakeholders with very different interests and perspectives can come together to achieve a consensus agreement on a very difficult issue that has vexed many other policymakers elsewhere. And this example shows that consensus need not be tepid; it can produce substantive, wide-ranging and meaningful reform that will reduce taxpayer and pension system exposure to financial risk and market risk, reduce long-term costs for employers/taxpayers and employees, and stabilize contribution rates for both employers and employees.”

In 2012, Atlas Network released the book After the Welfare State: Politicians Stole Your Future... You Can Get It Back, edited by Tom G. Palmer, Atlas Network’s executive vice president for international programs, published in cooperation with Students for Liberty. In its essays, an array of economists and authors explore how mutual aid has historically been provided in the absence of state-managed welfare systems, and identifies causes of fiscal insolvency in modern welfare states — including public pensions — along with proposing practical solutions for reform.