About the IPFI Pension Gap Calculator

The Institute for Pension Fund Integrity (IPFI) is dedicated to the proper management of our nation’s public pension funds.One of the key components of proper management is ensuring that fund managers are using realistic assumptions to value their pension liabilities. Unrealistic assumptions can lead to an undervaluation of plan liabilities which in turn leads to states contributing less than they should. This process compounds over years and results in skyrocketing unfunded liabilities. In order to raise awareness of the seriousness of this issue, we at IPFI have designed the Pension Gap Calculator, which allows everyday citizens to see what happens to unfunded liabilities as you adjust two of these assumptions.

One of these assumptions is a plan’s assumed rates of mortality.A mortality rate tells you the probability that someone at a particular age will die in the next year. For example, the RP-2014 mortality table published by the Society of Actuaries says that an 85-year-old retired man has a mortality rate of approximately .0743. This means that there is just over a 92.5% chance that such a man will live an additional year.

The calculator shows what happens if we decrease these retiree mortality rates between 0% and 10%.At the 0% end, the above mortality rate would remain at .0743 and at the 10% end it would be lowered to .0669. This means that the 85-year-old man from above would be 10% less likely to die in the next year compared to the initial estimate. When a user moves the tool, the reduction is applied across the board at every age level and is then used to estimate the additional rise in liabilities. As retirees live longer, the amount of benefits owed to them increases, causing liabilities to rise.

The second assumption used for the tool is the assumed rate of return.This assumption is often considered the most important assumption for pension valuations. In earlier decades, the norm was for public plans to assume a long-run rate of return of around 8.5%. During the 90s and early 00s, this wasn’t altogether unrealistic. However, since the Great Recession it is clear that plans need to reevaluate these assumptions with some experts suggesting they lower them to 5%.

But what does the unfunded liability look like if the assumed rate of return is lowered?This is where the calculator comes in with the ability to adjust the rate return from 2% up to 15%. As you lower the assumed rate of return, you will increase the level of unfunded liabilities. Users can watch in awe and terror as the bar graph skyrockets as the module moves closer and closer to 2%.

Of course, the calculator displays estimates only.Which might lead you to wonder how your state has performed in terms of meeting the assumed rate of return. If we look at the annualized ten-year rates of return for state pension plans since 2008, it is clear that failing to meet the assumed rate is the norm and not the exception. You can explore this reality using the following spreadsheet. [click to download]

In order to create the calculator, our team spent months combing through the Comprehensive Annual Financial Reports for all 50 states to build a database of pension liabilities and actuarial assumptions.By creating a straightforward tool that anyone can use, we hope that individual citizens can become more informed about our nation’s current pension crisis and that our calculator will create even greater transparency in the pension process. Please be advised that the numbers in the tool are estimates and are for research purposes only. IPFI is not responsible for the financial decisions of retirees.