Question:Â When you say the prior to the 1980’s, public pensions were funded in a traditional way, do you mean that the state governments simply put most of the funding in a fund as they went along, but then they started to put more and more of it into Wall St., so that after the meltdown (when all of the go-it-alone, self-reliant Republicans gladly took their government handouts), the reduced returns caused what can be viewed as temporary concerns that needed to be addressed so as to get them over the “speedbump,” the temporary squeeze???
Answer:Â Pensions used to be funded entirely on pay-as-you-go bases, referred to as PAYGO by many policy analysts.Â Employers and active employees made contributions out of which retirees were paid pensions. In most cases the contributions went into pension trust funds that were separate from general operating funds; in other cases there was no separation.Â Social Security today continues to be on a pay-as-you-go basis with there being a Social Security Trust Fund that is separate from the operating funds of the federal government.
Once prefunding became a goal, the funds attempted to build up reserves out of which all claims (liabilities) for current and retired workers could be paid in case contributions stopped. Thatâ€™s the origin of â€œunfunded liabilities.â€Â To increase those reserves, they began investing the funds in the stock market.Â As we know, stock market returns go up and down.Â So, you are right, the 2008 stock market crash has temporarily impacted the reserves of pension trust funds.Â But, and this is very important as you indicate, that has not caused an imminent crisis since the funds remain quite solvent and able to pay their current liabilities as well as those into the foreseeable future.
There are two types of state contributions: those that are for the normal operating expenses of the pension system and those that are used to build up the reserves enough so that they are fully funded.Â When states such as New Jersey do not pay even the normal contribution, that of course will aggravate the fiscal health of the system.Â No pension system can survive if no contributions are made to its trust fund.
James W. Russell