Industry News

On April 26, 2022, the Center for Retirement Research (CRR) at Boston College released its issue brief, Forensic Analysis of Public Employee Pension Funding: A Tool for Policymakers. According to the brief, state and local policymakers face an increasing pension cost burden, but may lack understanding of the root causes of pension underfunding. The brief discusses one of the major contributors to underfunding known as legacy debt in which historical unfunded liabilities accumulated before plans adopted modern funding practices.

CRR conducted forensic analyses for 13 large state-administered retirement systems in Con­necticut, Illinois, Massachusetts, Ohio, Pennsylvania and Rhode Island. Each analysis began with the earliest financial report available for the retirement system (typically from the 1940s) through subsequent reports for a timeline of key events in the system’s funding history. 

Some of the key findings include:

• Currently, legacy debt still exists since historical unfunded liabilities were ultimately paid in full using some of the money intended to fund future benefits.
• In a selected sample of plans with low funded ratios, the average legacy debt was over 40% of the unfunded liabilities.
• Legacy debt may have provided misleading information about benefit generosity that may be an obstacle for developing effective solutions.

According to CRR, “Continuing to manage legacy debt within the current framework burdens the current generation – who, at this point, is no more responsible for the legacy debt than any other – with the full cost of that transition. And, it may be encouraging misguided approaches to manag­ing more recent unfunded liabilities.” 

The brief is available here.