Understanding pensions
Pensions seem like a pretty simple idea: You save money and invest it, and over time, it provides enough income for a long, comfortable retirement. Then stock markets crash. People live longer than expected. Employers don’t save enough money. In a nutshell, that’s the situation now facing thousands of state and local governments, and the millions of employees and retirees depending on them for retirement. How they fix thousands of pension plans will affect practically every taxpayer in the nation. The question is how much. Here’s a primer on what the experts, politicians, unions and others are fighting about.
Traditional pension plans: The employer promises a retirement benefit based on a formula that combines the employees’ years of service, pay level and age at retirement. The employer assumes the risk for funding the plan and how investments perform. Most public-sector employees have traditional pensions. Most private-sector workers don’t.
Defined-contribution plans: The employer and worker contribute to a retirement savings plan such as a 401(k), but the responsibility to save enough and manage investment risk falls on the employee. This is now the most common plan for private-sector workers.
Hybrid plan: A reduced version of a traditional pension, plus a 401(k)-style plan. Some local governments are using this approach to cut costs.
How traditional plans work: Employers and sometimes workers regularly contribute to a pension fund that is invested in stocks, bonds and other things. The employer makes a “required annual contribution” based on how investments are performing, how fast wages are rising, how many employees are retiring and how many retirees are dying. To reduce costs, employers may close pension plans to future hires or reduce future benefits. But they can’t reverse promised benefits that employees have already earned. The cost of those obligations may still rise in a closed plan if investments do poorly.
Pension liabilities: Businesses and governments differ in how they estimate long-term pension obligations. Accounting rules allow governments to use more optimistic assumptions based on the returns they expect to earn on pension investments. Businesses must use more conservative estimates that require them to save more money. Critics say the governments’ approach underestimates their pension liabilities; government officials counter that businesses have to be more conservative because few survive as long as governments.
Differences between public-sector and private-sector pensions:
● Government employees usually contribute about 5 percent of their pay to their traditional pensions. Private-sector employees with traditional pensions usually don’t contribute.
● Private employees are enrolled in the Social Security system. Some government employees — including Atlanta’s — are not.
● Private companies can file bankruptcy to shed pension obligations. The federal Pension Benefit Guaranty Corp. then takes over the pension plan.
● Government pension plans don’t have such backing, and they often can’t file bankruptcy.
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Meet our reporter
Russell Grantham began poring over pension plan documents several years ago for The Atlanta Journal-Constitution when he uncovered controversial moves by Delta Air Lines to protect its executives’ pensions from a potential bankruptcy filing. (That filing, in fact, occurred later.) Likewise, he documented major Atlanta corporations’ retreat from traditional plans in recent years.
From west Texas, Grantham began his journalism career nearly three decades ago. He’s now a Sunday business reporter for the AJC, which he joined 11 years ago after working at several newspapers, including The (Memphis) Commercial-Appeal, Ann Arbor (Mich.) News and Ledger-Enquirer in Columbus. He and his wife, Carol, live in Avondale Estates.
Grantham has an MBA in finance from the University of Michigan and a journalism degree from the University of Texas, and he’s working toward a CFA (investment analyst) designation.
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How we got this story
As Atlanta’s pension problems grew into a budget crisis, The Atlanta Journal-Constitution decided to examine the status of other public pension programs in Georgia, including those of the five largest counties and the two biggest plans administered by the state of Georgia: the largest is for public schoolteachers, and the second-largest for most other state employees.
During a five-month investigation, the AJC reviewed hundreds of pages of financial statements, valuation reports, audits, academic studies and data provided by the various governments and pension plans.
We also conducted dozens of interviews with government and pension officials, actuaries, retirees, employees, researchers, lawyers, taxpayer advocates and others.
What emerges is a complex interplay of past government decisions, stock market bubbles and crashes, politics and accounting rules that adds up to billions of dollars in deficits at local public pension plans.
