Tuesday, March 17, 2009

Public Pensions Bills to Surge, Taxpayers on the Hook

The WSJ's Craig Karmin has an interesting article on pensions ("Pension Bills to Surge"):


Everyone acknowledges we have to hire good teachers, police officers, and firefighters; however, to prevent the public sector unions from taking more taxpayer funds than necessary, taxpayers need to be ever-vigilant. After all, that's our money and our children's money they're investing and taking.

Public pensions are an especially difficult issue to resolve, because they represent a long-term taxpayer liability. Thus, taxes and services do not need to be immediately raised or cut even if a pension's actuarial projections are incorrect. This absence of a short-term trigger makes it harder to alert taxpayers to the slowly ticking time bomb of pension liabilities.

California's problems are acute because even if pension assets decline substantially, payouts do not change. For example: if a California public pension loses 20% of its assets in one year, retirees still get paid the same amount, even though the pension has to dip into its assets to make the payouts. Why is this a problem? Dipping into a pension's assets usually means the pension is underfunded and will need higher-than-normal returns or more taxes to keep paying retirees. So either taxpayers are on the hook for ever-expanding retiree benefits, GM-style, or pension funds have to take risky investing strategies to bridge the gap between payouts and assets. No incentive exists for prudence. It doesn't have to be this way.

Wisconsin has a prudent policy "of adjusting the amount of benefits paid based on the pension fund's performance." Although this policy causes to retirees receive a benefit reduction, it also creates incentives for conservative investments and fewer tax hikes. If a pension doesn't do well, at least retirees will complain and hopefully cause some changes to be made to sustain the pension without a call for higher taxes (yes, this is partly wishful thinking, but at least someone becomes accountable more immediately). The WSJ also points out that some state employees could be switched to 401k plans, which is something I've advocated in the past. (See here.)

No matter what the solution is to the pension liability problem, action needs to be taken. More of the same isn't acceptable.

Bonus: Shelby Steele writes a very interesting article on Republicans and race:


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