We have written previously about the dilemma facing advisors who try to help clients integrate public-sector defined benefit pension promises into retirement income planning.

The simple, logical approach is to assume that 100 percent of promised pension benefits will be paid on schedule. Yet, the funding of many public-sector plans is so rickety that this approach can leave your clients stranded later in retirement with less income than they expect or need.

We’ve suggested that one solution is to help clients decide what part of their pension benefits – from 100 percent down to perhaps 70 percent – they want to illustrate as reliable, given funding realities of their specific plans.

But how do clients make such a decision?

A new free online analytical tool created by the Stanford Institute for Economic Policy Research can be helpful. Called Pension Tracker, it contains realistic data that relates directly to the fiscal health of public pension systems of each state.

Pension Tracker includes a new metric, called Market Pension Debt, which is long overdue in evaluating the soundness of public-sector pensions.

Unlike private pensions, which are required to estimate their future liabilities using a conservative discount rate, public pensions can choose any discount rate they believe investments can earn. Choosing 7.5 percent is typical, says Stanford Institute.

But the higher the discount rate, the lower the present value of future liabilities. Stanford calls the calculation of total present-value pension liabilities, using each state’s chosen discount rate, Actuarial Pension Debt.

In calculating Market Pension Debt, Stanford Institute assumes a discount rate equal to 20-year Treasury yields rounded to the nearest one-quarter percentage point – currently 2.2 percent. This is not only much more conservative than Actuarial Pension Debt but also more in line with discount rates of private-sector pensions.

Then, Stanford expresses the financial health of public pension systems using several metrics including Pension Debt Per Household and Funded Ratios, expressed on both an Actuarial and Market basis. (The funded ratio is the market value of plan assets divided by the present value of future liabilities.)

On an Actuarial basis, the present-value pension liabilities of all U.S. public pension programs combined total $1.04 trillion, or $8,872 per U.S. household.

But using the more conservative Market basis, total present-value pension debt balloons to $4.83 trillion, $41,219 per household. Using aggressive discount rates makes all U.S. public-sector pension liabilities appear to be only 22 percent of what they would be with a conservative rate!

On a Market basis, the funded ratios of a few states are in basket-case territory. They include Illinois (23.3%), Connecticut (25.5%), and Kentucky (29.8%). As an indication of what a shambles public-sector pension funding has become overall, only nine states have Market-basis funded ratios above 50 percent.

Using Public Tracker to discuss Market-basis pension debt per household and funded ratios for your state will be an eye-opener for clients who participate in public pension plans. They will be less likely to believe 100 percent of the promises, and perhaps more likely to plan prudently for a realistic retirement income that won’t disappoint in the long run.

To help clients drill-down into details of their own specific public pension plans, you can use the Public Plans Database of the Center for Retirement Research at Boston College.

Instant Insights /

A new way to open discussions about pension benefit reliability

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