On Florida’s Pension Shortfall

I wrote this to a friend who shared a story about Florida’s pension shortfall with me.

This is actually true in one respect but a bit overblown as well. No one can predict short-term market returns be it stocks, bonds, mortgages, real estate, or another asset. Over the long term (30+ years) we can be more confident stocks will return about 10% per year or 7% adjusting for inflation, on average. I would not say Florida Retirement Systems’s expected returns are too high based on this, although they are 30 basis points higher than the Governmental Accounting Standards Board (GASB; 7.2% vs. 6.9%) and probably should at least be reduced to 6.9%.

However, it is true that Florida has an actuarially projected shortfall and it’s much more than $15 billion. As of June 30, 2019 assets were $163.1 billion with 83.9% of anticipated liabilities funded, or only 82.6% if following GASB standards. That’s a $30 billion+ shortfall. Of course, a giant pension fund exists forever (in theory) and is quite different from investing for retirement at the individual level, so adjustments can be made to correct the course of this giant ship.

Remember that Florida already cut benefits heavily in 2011 for new and existing employees, which was an invisible pay cut—although quite visible to our in-service teachers and other public workers who had a new 3.0% payroll deduction added to their paycheck that was previously state-funded. Now, as so many states do, the legislature refuses to adequately fund pension benefits and will have to pay even more down the line in order to do so. Where will they get the money—particularly when a recession hits? It’s an open question here and across the country, and in fact Florida is one of the better-funded retirement systems and the state also has an AAA credit rating with S&P and Fitch.

The above applies to the Florida Retirement System pension plan only. Florida is unusual for offering the choice between a pension plan and an investment plan. Members in the investment plan will not receive a pension and their accounts are fully funded in the same manner as a 401(k) plan. New teachers and other public workers are now put in the investment plan by default unless they go online, call, or visit HR to change to the pension plan. The system includes 502,146 active pension members and 145,796 investment plan members, so the bulk of Florida’s public workers are in the pension plan to which the above shortfall applies, although newer teachers and other public workers are more likely to be in the 401(k)-like investment plan.

Data is from the Florida Retirement System Pension Plan and Other State Administered Systems Comprehensive Annual Financial Report, FISCAL YEAR ENDED JUNE 30, 2019.

Please read my doctoral dissertation for further insights: A Survey of Investing and Retirement Knowledge and Preferences of Florida Preservice Teachers.

Richard Thripp, Ph.D.
Democratic Candidate for U.S. Congress (FL-06)
Adjunct Faculty, University of Central Florida

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