Teacher Pensions Blog

At the same time as states face budget shortfalls in the wake of the COVID-19 pandemic, public pension plans also lost an estimated $400 billion in assets in the first three months of 2020. In response, as part of a larger request for a COVID-19 relief package the Illinois Senate President called for $10 billion in federal funding to help plug Illinois' state and municipal pension funding gaps. 

Historically, Congress has enacted rules and regulations to govern private-sector retirement plans, but it has mostly shied away from extending those rules to the public sector. Should that change? Are state and local pension plans in such a dire situation that they need the federal government's support? And if so, what should Congress ask for in return? We reached out a range of voices to weigh in on these questions. Here are their responses: 

Andrew Biggsresident scholar at the American Enterprise Institute

Public sector pensions have long argued that they need not abide by the stricter federal funding rules applied to private sector pensions. Private pensions must assume conservative rates of return on investments and must address unfunded liabilities promptly. Under those rules, the average single-employer private pension today is about 86% funded, assuming a 3.4% “discount rate” applied to plan liabilities. Measured using that same discount rate, the average state and local government pension would be around 38% funded. Simply put, for each dollar of promised future benefits, private sector pensions have set aside nearly twice as much money as state and local plans.

State and local governments have long fought stricter pension funding rules. They assumed average investment returns of 7.3% in 2019 and amortized unfunded liabilities over decades rather than years. They claimed that governments have special powers that make the more-prudent federal regulations unnecessary. These arguments were wrong before and today, with pensions worse-funded than following the Great Recess and Illinois requesting $10 billion in federal aid to stay afloat, they are more clearly mistaken.

Federal law already regulates state government workplaces via minimum wage laws, the Affordable Care Act and other means. There is today compelling evidence that underfunded state and local government pensions should be similarly-regulated. But federal regulation of state and local pensions, by covering them under the Employee Retirement Income Security Act of 1974 (ERISA), could be made voluntary and come with certain benefits.

Congress could allow state and local pensions to become ERISA-regulated in exchange for providing them with financial aid, such as to cover pension contributions over the next several years. Pension participants would also become employees eligible for Pension Benefit Guaranty Corporation benefit insurance should their plan become insolvent in the future. In return, the state or local government would need a credible plan to significantly increase future funding of their pension and address unfunded liabilities promptly, while also paying PBGC insurance premiums. Congress might also include a provision requiring that governments seeking federal pensions assistance enroll their employees in Social Security, if not already covered.

But ERISA regulation provides another option: if a state cannot or does not wish to fund a traditional pension to ERISA standards, it can instead freeze its pension and shift employees to a defined contribution, 401(k)-style plan. Because federal law pre-empts state law, ERISA coverage would free states like Illinois from legal prohibitions on changing future benefit accruals or altering the plan’s structure.

The issue is simple: Federal pension regulations exist for a good reason and those reasons apply to governments as much as to private companies. Those regulations offer employers a choice: either run a traditional pension prudently, using conservative assumptions and prompt addressing of unfunded liabilities, or don’t run one at all. 


Chantel Boyens, principal policy associate in the Income and Benefits Policy Center at the Urban Institute 

One important role of the federal government in supporting state and local governments as they address ballooning debt is to ensure that any steps taken to address financial shortfalls do not undermine the retirement security of workers broadly, and especially the adequacy of benefits for lower-wage workers. This includes preventing state and local governments from reducing pensions below Social Security levels for workers not covered by the program. Pension plans should not be allowed to continue reducing future benefits for workers not covered by Social Security through loopholes and gaps in the existing regulations. 

Like other state and local pension plans, plans offered to workers not covered by Social Security have reduced promised benefits for new hires substantially since the Great Recession. But because these plans are offered to workers not covered by Social Security, they are required by law to provide participants with benefits that are at least equivalent to those provided by Social Security. However, recent analyses by Chad Aldeman and Laura Quinby show that the safe harbor test used to determine whether state and local pension plans meet this threshold is not adequate. 

As state and local pension plans consider steps to address funding shortfalls, the federal government has a responsibility to ensure that the retirement safety net provided by Social Security protects all workers. For workers outside of Social Security, that means strengthening the safe harbor rule that governs their non-covered pension plans. For example, the rule should consider protections for workers who change jobs and may move in and out of Social Security coverage. Most plans use backloaded benefit formulas and vesting requirements that favor long-tenured workers

The risks posed to workers by shortfalls in state and local pension plans also underscores the case for moving to a truly universal Social Security program. Covering all workers would impose transition costs on states. The federal government could consider options to help states manage these transition costs over time or even subsidize a portion of the cost to protect the adequacy of benefits for all workers. 


Keith Brainard, research director, on behalf of the National Association of State Retirement Administrators

A careful review of the operations and funding of public pensions, their share of overall state and local budgets, and the steps state and local governments are taking to bring their pension plans into long-term solvency, reveals that on the whole, state and local pensions are weathering the COVID-19 crisis. Public retirement system administrative operations have successfully been moved remotely; payments to retirees continue to be made on time and in full; trillions of dollars in public pension fund assets continued to be managed and invested in the financial markets; and measured changes can be expected to continue to be made to ensure public pensions’ long-term sustainability. Suggestions for federal intervention into public pension plans continue to be resoundingly rebuked.

NASRA opposes efforts to both impose new federal regulations on state retirement systems, and to restrict states’ ability to design plans and manage investments. NASRA testimony before a U.S. Congressional Committee in 2011, remains relevant today. Over the last generation, most public pension plans have moved from financing on a pay-as-you-go basis, to funding based on actuarial methods. State and local pensions’ long-term financing strategy, which takes place over decades, should not be mistakenly juxtaposed against current annual revenues and expenditures of state and local governments. Given the differing plan designs and financial pictures across the country, one-size-fits-all federal intervention is unhelpful.

As national organizations representing state and local governments and elected officials have jointly stated, “Federal regulation is neither needed nor warranted, and public retirement systems do not seek federal financial assistance. State and local governments have and continue to take steps to strengthen their pension reserves and operate under a long-term time horizon.”


Dr. Marguerite Roza, research professor at Georgetown University and director of the Edunomics Lab

First and foremost, any federal action on state and municipal pensions must include an expansion of ERISA – the law that requires private sector pension systems to properly fund their obligations on an annual basis. Those underfunded systems that can’t meet the ERISA terms and needing a bailout would then be subject to the following requirements:

1. Close under-funded pension plans to new salary dollars. Pension systems deep in a hole must first stop digging, in this case by closing the pension fund to new salary obligations. Pensions on existing salary dollars would be protected and continue to earn years of service. Employers could award new raises, but the increments of the raise would be non-pensionable (although could be eligible for other compliant retirement plans). Often it is local employers who award late-career raises (which drive up pension obligations) but states who then must pay the pensions. Edunomics Lab analysis shows that California’s CALSTRS plan would have over $16B less in obligations if such a requirement had been imposed 10 years ago (even after accounting for what would be lower employee contributions).  

2. Pay for any bailout with a federal tax on pension payments from systems needing rescue funds. In places like Illinois, leaders pledged to unsustainable pensions, ignored their debts, and paid more in salaries (further driving up pension debt). Leaders in other locales, like neighboring Wisconsin, followed a path of fiscal prudence and paid its debts, even when doing so has meant teachers earn $10K less per year. So, who should own Illinois’ pension tab?

Illinois’ TRS fund needs a bailout, and while Illinois leaders haven’t been able to legally modify the generous pensions it promised, the federal government can tax those payments. The tax could take the form of a flat or progressive rate, collected by the pension fund via a monthly withdrawal from pension checks. Where a retired teacher earns $130,000 per year from the Illinois TRS (and yes, plenty do), the payments could be taxed before they ever reach the retiree. Such a tax would only last as long as the fund needed bailing.

This plan gives states the tools they need to get back on track financially without passing the debt burden to younger generations who neither benefitted from the spending nor had no say in the decisions that got us here.