The Maryland state retirement and pension system is in bad shape. The deluxe benefits package has $37 billion in assets, but even that amount isn’t enough to meet the promises made to government bureaucrats. In the last fiscal year, this prodigious sum was invested in a way that yielded a negligible 0.36 percent return.
That would be bad enough, but State Treasurer Nancy Kopp, chairman of the pension-system trustees, insists on pretending the fund is earning 7.75 percent for the purposes of calculating future value. This accounting gimmick masks the dire situation of the program’s finances. Retirement funds are generally considered solvent when they have enough assets to cover at least 80 percent of future obligations. The most generous estimates put Maryland’s pension funding level at a bare 64 percent.
Expecting a 7.75 percent return in the future is unrealistic, even though such returns were possible in the past. The sluggish U.S. economy, recession in Europe and declining growth rates in China and India are signs the future won’t be quite so bright. The average annual return in the last five years has been a dismal 0.78 percent. Dialing back the expectations by just a quarter of a percent increases the pension system’s unfunded liabilities from $20 billion to $24 billion.
Those liabilities will only get worse since the Old Line State’s contributions have been well below the amount that would actually cover the obligations to state employees and teachers. According to Moody’s, Annapolis put in $1.4 billion in 2011 — $500 million less than the actuarially recommended level of $1.9 billion. The current system is designed to give the state the option of deferring the large payments the fund needs. It’s a practice that might soon come to an end, if the system board’s recommendations are accepted by Gov. Martin F. O’Malley, a Democrat.
Declining returns and increasing shortfalls encourage pension funds to undertake riskier investments, just when the share of retirees is increasing. As a 2012 study by Aleksandar Andonov and Rob Bauer of Maastricht University and Martijn Cremers of Yale University found, public pensions in the United States have far greater discretion in choosing their rate of return, compared to American corporations and public pensions in Canada and Europe. The resulting opacity allows public pensions to camouflage the actual risk and understate the extent of underfunding, which allows them to put off politically unpalatable decisions.
With the growing shortfall and falling returns, Maryland will either have to raise taxes further to cover its promises, or it needs to cut benefits. It’s extremely unlikely overtaxed Marylanders will quietly go along with paying more to subsidize those on the public dole. Many other states face the same dilemma. The sooner government acknowledges reality, the better chance there will be to head off a collapse.
Nita Ghei is a contributing Opinion writer for The Washington Times.