August 6, 2020

An Analysis of Connecticut’s Public Employee Retirement Plans

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Connecticut’s public employee pension plans are among the most poorly-funded in the nation. With few additional financial resources at its disposal Connecticut, like other states, has shifted to increasingly risky investments in hopes of garnering higher returns and reducing the need for increased taxpayer contributions. Regrettably, most government disclosures and reports on pensions ignore this investment risk.

In “An Analysis of Connecticut’s Public Employee Retirement Plans,” Tracy Miller and Andrew Biggs examine the range of possible investment return outcomes for Connecticut’s public employee retirement plans. They then use a computer simulation model to illustrate how more realistic rates of return, which reflect the status of pensions as safe investments, would require even greater annual employer contributions to restore Connecticut public pensions to full funding.

Getting Real Over Pensions

Currently, Connecticut’s public employee pension plans assume a 6.9 percent annual return. But because these plans invest in risky portfolios, there is a substantial probability that rates of return will be lower than 6.9 percent. If Connecticut’s pension investments returned 4.1 percent annually the state would need to increase pension contributions by about 44 percent to achieve full funding over its scheduled time frame of between 20 and 25 years.

Restoring Connecticut’s pensions to full funding will likely cost well more than the 13 percent of the state budget that Connecticut has recently been spending. Increasing contributions to pensions will necessarily require the state to make difficult trade-offs, including cuts for other state and local government priorities such as education, healthcare, and transportation.

Three Things That Connecticut Can Do to Address the Problem

  1. The state intends pension benefits to be as safe and certain as payments offered to bondholders. Even though the pension funds are invested in risky assets, their liabilities should be valued using a discount rate equal to bond interest rates. 
  2. Connecticut’s pensions should provide greater disclosure of how risky pension investments could affect plan funding and taxpayer costs. Risky investments like stocks remain risky even over the long term, but pension financial disclosures ignore this risk.
  3. The state of Connecticut either should commit to providing more funding each year or find a way to reform pensions so that taxpayers share with employees the risks of offsetting lower than expected investment returns in the future.