According to Johns Hopkins University School of Medicine, the COVID-19 pandemic has now resulted in more than 700,000 deaths in the United States. Aside from the unprecedented number of deaths, the pandemic has also shocked our economy. In the spring of 2020, the stock market dropped dramatically and the unemployment rate climbed to almost 15 percent, the highest level since the Great Depression, as businesses shut down. The twin public health and economic crisis logically raised red flags about the strength of the pillars of our retirement security system, including the Social Security trust funds and defined benefit pension plans.
As an example, last month, the annual Social Security Trustees Report revealed the funds would be unable to pay full benefits in 2034, compared to last year’s estimate of 2035. The estimate reflects the push and pull of the pandemic. On the one hand, the short recession following the first wave of COVID-19 reduced revenue from payroll taxes and contributions to the funds. On the other, the virus’s disproportionate impact on older people resulted in many premature deaths in that age group, cutting future benefit payouts.
Has COVID-19 similarly affected public pension plans? To answer this question, it’s important to examine how the pandemic impacted three areas—investment returns, state budgets, and demographics.
First, public pension plans rely on investment returns for most of their revenue. A recent National Conference on Public Employee Retirement Systems (NCPERS) study found that public pension plans receive 71 percent of their revenue from investment earnings. Even though the stock market tumbled by 34 percent in March 2020, the market subsequently bottomed out late that month before rallying 68 percent for the rest of the year, breaking all records. Not surprisingly, pension plans experienced historical gains. On average, plans saw investment returns of more than 25 percent for fiscal year 2021, the highest annual return in more than 30 years.
Second, public pension plans rely on annual contributions from state budgets. According to the same NCPERS study, public pension plans obtain 22 percent of their revenue from employer contributions carved from state budgets. In this instance, where tax revenues drop, state budgets may fall short on the annual required contribution. Last spring, many states saw their tax revenue decline sharply due to lockdown orders and businesses closures. Specifically, tax revenue for state budgets from April through June 2020 fell by 25 percent compared to the same quarter of 2019. Yet, the doom and gloom about state budgets did not play out. In the end, states collectively received almost the same revenue in 2020 compared to 2019. Two studies by the Pew Charitable Trusts and the Federal Reserve Bank of St. Louis concluded that state revenues for 2020 turned out better than anticipated. More importantly, a Pew study found a significant increase in contributions to pension plans from employers and employees. In fact, “Pew found that for the first time this century, states are expected to have collectively met the minimum pension contribution standard.”
Finally, pension plans use demographic assumptions to determine fiscal impact. In this instance, actuaries ask whether pandemic-related deaths and early retirement of public employees have a financial impact on pension plans. According to the American Academy of Actuaries (AAA), the demographic impacts of both COVID-19 deaths and early retirement remain uncertain. As AAA states, “Even with recent progress developing treatment and vaccines, the long-term impact on mortality is unknown.” With regard to increased retirement, AAA writes that “[i]t isn’t yet clear how strong these trends are, how long they may last, and whether they will have a positive or negative effect on public pension plans.”
In short, COVID-19’s impact on investment returns and state budgets did not result in the severe harm on pension plans some observers predicted. To the contrary, pension plans experienced a once-in-a-generation historic returns and increased contributions, part of a continued trend over the last decade. The last factor of demographic assumption appears to have had very little effect on pension finances in the short-term; however, the long-term impact remains uncertain.