NASRA Updates Brief on Public Pension Plan Investment Return Assumptions

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NASRA Updates Brief on Public Pension Plan Investment Return Assumptions

On March 20, 2024, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, Public Pension Plan Investment Return Assumptions. NASRA examined public pension investment return data and found that recent changes in economic and financial conditions have caused many public plans to reexamine their investment return assumptions.  

Since fiscal year (FY) 2010, all of the 131 plans measured have reduced their assumed rate of return with 94 of those plans (72%) doing so since FY 2020. For the 131 plans, the average return assumption is 6.91% in FY 2023 down from 7.33% in FY 2018. The brief also provides a table showing the investment return assumptions that are in use, or announced for use, by the 131 plans included in the Public Fund Survey as of March 2024.   

In addition, the brief also discusses how the investment return assumption is established and evaluated. Then, it compares these assumptions with public funds’ actual investment experience and the challenging investment environment for public retirement systems.   

The brief emphasizes that a governmental plan’s investment return assumption is focused on the long-term, typically an investment horizon of 30 to 50 years. Investment returns are important because investment earnings account for a majority of the revenues received by most public pension plans. According to the brief, since 1992, public pension funds have accrued an estimated $10.4 trillion in revenue. Of that amount, investment earnings account for $6.5 trillion (63%), employer contributions account for $2.7 trillion (26%), and employee contributions account for $1.1 trillion (11%).   

Typically, a 25-basis point reduction in the investment return assumption will increase the cost of a plan that has a cost-of-living adjustment (COLA) by 3% of pay (i.e., a reduction from 7.5% to 7.25% will increase the cost from 10% to 13% of pay). For a plan without a COLA, the return assumption will increase the cost by 2% of pay.  

The brief concludes, “In terms of its effect on a pension plan’s finances and funding levels, the investment return assumption is the single most consequential of all actuarial assumptions. The sustained period of historically low interest rates, which lasted for over a decade beginning in 2009, combined with lower projected returns for most asset classes, caused many public pension plans to reduce their long-term expected investment returns.”   

In addition, the brief contains two appendices with: 1) the current nominal investment return assumption used in the 131 public pension plans in NASRA’s dataset; and 2) the entity responsible for setting the investment return assumption for each plan. 

The brief is available here. 

CRS Reports on Social Security Coverage of State and Local Government Employees 

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CRS Reports on Social Security Coverage of State and Local Government Employees

On March 19, 2024, the Congressional Research Service (CRS) released its report, Social Security Coverage of State and Local Government Employees. The report focuses on Social Security coverage provided under current law for state and local government employees and also discusses issues related to proposals for mandatory coverage for newly hired governmental employees.

Over the years, there have been many proposals to make Social Security coverage mandatory for newly hired state and local government employees. As of 2021, there were nearly 21.9 million state and local government employees with about 15.9 million (73%) that participated in Social Security; however, about 5.9 million (27%) of these workers are not covered by Social Security through their government employment. The majority of noncovered state and local government employees work at the local level with the largest share being police officers, firefighters and teachers.

Every state has a combination of state and local government employees with and without Social Security coverage. As a result, every state would be affected by a Social Security coverage mandate. The impact on state and local plans and the net effect on total benefits would vary across plans as well as among individuals. 

Overall, in 2021, eight states accounted for about 76% of noncovered state and local government employees (California, Colorado, Georgia, Illinois, Louisiana, Massachusetts, Ohio and Texas) and three states accounted for about 49% of noncovered state and local government employees (California, Ohio and Texas). 

The report is available here.

CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

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CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

On February 28, 2024, the Congressional Research Service (CRS) published its updated report, Social Security: The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The report provides an overview of the WEP and the GPO, which are two separate provisions that reduce regular Social Security benefits for workers and their eligible family members if the worker receives (or is entitled to) a pension based on earnings from employment not covered by Social Security. 

The WEP affects Social Security benefits paid to individuals who earn Social Security benefits from Social Security covered employment, but who also earn pension benefits from state or local government employment not covered by Social Security.  In these cases, Social Security benefits are lowered by the WEP.  

Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers. This is done by: 1) calculating an employee’s average indexed monthly earnings (AIME) from employment covered by Social Security; and 2) calculating the employee’s primary insurance amount (PIA) using a formula that applies a higher replacement percentage to lower earnings than to higher earnings. 

In 2024, the PIA formula is: 

  • 90% for the first $1,174 of AIME; plus
  • 32% of AIME over $1,174 and through $7,078 (if any); plus
  • 15% of AIME over $7,078 (if any).    

Before the WEP was established, for those who split their careers between covered and non-covered Social Security employment, the PIA formula resulted in a higher proportion of covered earnings being subject to the 90% rate. This resulted in what some perceived as a “windfall.” In 1983, Congress passed the WEP to eliminate this perceived advantage by lowering the 90% rate to 40% for those subject to the WEP. As of December 2023, Social Security Administration data indicated that about 2.1 million individuals (or about 3% of all Social Security beneficiaries) were affected by the WEP, with about 2.0 million of those being retired-worker beneficiaries (or about 4% of the entire retired-worker beneficiary population).  

Under the GPO, an individual’s Social Security spousal or survivor’s benefit is reduced (“offset”) by two-thirds of the pension benefits received from federal, state, or local government employment that is not covered by Social Security. According to the report, about 746,000 Social Security beneficiaries (or about 1% of all beneficiaries) had spousal or survivor benefits reduced by the GPO as of December 2023. Of those, 51% were spouses and 49% were widows and widowers, with about 68% of all GPO-affected beneficiaries had their benefits fully offset and about 32% had their benefits partially offset.  

The report is available here.

NIRS Updates Report on Americans’ Views on Retirement Insecurity in 2024

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NIRS Updates Report on Americans’ Views on Retirement Insecurity in 2024

Recently, the National Institute on Retirement Security (NIRS) released its report, Retirement Insecurity 2024: Americans’ Views of Retirement. The report findings are based on a national opinion survey of working-age Americans on numerous retirement security issues related to restoring the “American Dream” of retirement. The survey was conducted by Greenwald Research in October 2023 with a total of over 1,200 individuals aged 25 and over. 

The key findings include: 

  • ​About 75% of survey respondents expressed strong support for pensions to provide financial security in retirement with 83% expressing that all workers should have a pension to be independent and self-reliant in retirement;
  • 79% of respondents feel there is a retirement crisis, up from 67% in 2020 while 55% are concerned about financial security and 73% are concerned about inflation;
  • 87% of Americans are highly supportive of Social Security regardless of the status of federal budget deficits while 52% support expanding the program and 90% reported that Social Security’s funding shortfall should be a priority for the next President and Congress; and
  • 87% of Americans are concerned about rising costs while 80% are worried about increasing costs of long-term nursing care in retirement. 

The report is available here.

GRS Consultants Present at MAPERS One-Day Seminar

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February 29, 2024

GRS Consultants Present at MAPERS One-Day Seminar

Jeffrey Tebeau and Casey Ahlbrandt-Rains covered trending topics for public pension plans at the Michigan Association of Public Employee Retirement Systems (MAPERS) One-Day Seminar. During the session the presenters covered: Inflation and Capital Market Expectations; Lingering Effects of the Pandemic; Updates to Actuarial Standards of Practice (ASOP) 4; and Layered Amortization of the Unfunded Liability.

Key discussion items:

• Impact of inflation on both retiree purchasing power and development of actuarial assumptions
• How capital market expectations are used to develop the actuarial valuation’s investment rate assumption
• Review of post-pandemic scenarios for mortality assumptions
• Revised ASOP 4 requires the Low-Default-Risk Obligation Measure (LDROM) be disclosed in the funding valuation and comparison of LDROM and AAL (Actuarial Accrued Liability)
• Reducing contribution volatility using layered amortization and weighing its pros and cons.