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Louisiana Pensions: A Bargain for Teachers, A Burden for Taxpayers

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By Lance Christensen and Adam Crepelle

According to the 2013 Comprehensive Annual Financial Report of the Teachers’ Retirement System of Louisiana (TRSL), the TRSL has unfunded actuarial accrued liability (UAAL) of $11.3 billion, with the funded ratio being only 56.4%. Louisiana had a population of about 4,625,470 people in 2013. This means each Louisiana citizen is responsible for approximately $2,450 of TRSL’s funding gap, not to speak of all the other pension benefits that may be underfunded because of rosy investment scenarios and other normal costs. The TRSL is not unique among Louisiana or other pension plans around the nation with massive unfunded liabilities. Estimates that use a realistic discount rate in calculating pension liabilities show the total state level pension debt in the United States at $4.1 trillion.

The average pensioner in TRSL who depends on a sustainable fund for their retirement may be troubled by this, but their pension board doesn’t seem to be fazed by the huge liabilities that may impact their personal retirement funding. In fact, the TRSL member handbook claims the overextended pension plan it provides TRSL members is a great deal. Quoting from the TRSL member handbook:

“What a bargain! What you receive in retirement benefits is worth much more than what you pay in contributions, and is a far better value than a retirement annuity purchased through an insurance company.”

Pensions are funded through contributions by the employee and employer. In year 2013, members of the TRSL K-12 Regular Plan contributed 8% of their salary to the pension fund; whereas, TRSL employers (Louisiana’s taxpayers) contributed 24.5% of the employee’s salary to the pension fund. The high employer contribution was due to the high amortization cost, which accounted for about 76% of the employer payment, to pay for the large unfunded liability, which in turn was caused by both lower than expected investment returns and less than full payment of required contribution.

Regardless, the TRSL boasts, “The TRSL benefit the teacher paid $50,000 for is worth more than $335,000!”. To fulfill this promise, the TRSL assumes an unrealistic discount rate of 8 percent and relies on high expected investment returns to compensate for the low required contribution. That did not turn out well, as evidenced by the hefty unfunded liability and a fifteen-year rate of return of only 6.2%. The gap, of course, is picked up by taxpayers.

In this case, “bargain” is clearly a relative term. You don’t need a degree in mathematics to figure out who is on the better end of this bargain. Delivering the guaranteed benefits to the employees requires the system to earn a risk-free rate of return of 8%, which does not happen in today’s economy. Nevertheless, the TRSL is flaunting its march towards insolvency.

Most TRSL members do not participate in Social Security, so it may be helpful to make a comparison between the benefits of the two systems as TRSL did in their members’ handbook: “Did you know that a retirement benefit from TRSL costs about the same as one from Social Security? But Social Security benefits are generally only 40 percent of your average salary, while TRSL retirement benefits are typically 60-75 percent of your highest, three-or five-year average salary consecutively earned.”

TRSL members may contend they have paid for their pensions, but as the quote above clearly points out, TRSL openly acknowledges that members do not pay for the benefits they receive. TRSL benefits are not even targeted by Louisiana’s state income tax while private retirement plans are hit by the Louisiana income tax.

Many of our public pension systems operate outside the laws of reason and are usually motivated more by political interests than practical economics. Exacerbating this unfunded liability with increasingly dishonest salesmanship with TRSL’s assertion that their pension plan is a “bargain” does not serve the people for whom they are supposed to provide retirement security. Consequently, the TRSL, and most other pension systems, need a dose of reality via pension reform.

Lance Christensen is the director of Reason Foundation’s Pension Reform Project and Adam Crepelle is a student at Pepperdine University’s School of Public Policy. This article first appeared at Reason’s Out of Control Policy Blog. 

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