Tuesday, October 5, 2010

Public Employee Pension Reform

RealClearMarkets - The False Obstacles to Pension Reform
Across the country, pension actuaries are coming to state legislatures and calling for an increase in pension contribution rates, which is needed to shore up the funds since they have lost so much value. For example, New York City's pension costs have risen over the last decade from approximately $1 billion per year to $8 billion, and will soon reach $10 billion. In response, many states are acting to reduce costs, by trimming future benefits and requiring employees to pay more. 16 states enacted pension reforms in 2008 and 2009, and at least five more have followed in 2010.

Yet, with the key exception of Utah, states have shied away from following private firms' lead and abandoning defined benefit. (84% of state and local employees retain defined benefit coverage, compared to 21% of private sector workers.) Even in New Jersey, where Governor Chris Christie is proposing reforms that are sweeping relative to what is being done in most other states, the proposed reform package maintains the essential defined-benefit nature of employee retirement benefits.

This is a concern, because the problems with defined-benefit pensions aren't a one-time fluke caused by a bad recession and a stock market crash. Their flaw, especially in the public sector, is structural: they involve lawmakers making promises today about payments the state will make decades from now. There is a strong incentive to offer extra retirement benefits instead of extra cash compensation, because the cost can be pushed off into the future. And because the actuarial math is so complicated and subjective, analysts and legislators have trouble figuring out how much pension benefits really cost.

An excellent discussion of the problem by Josh Barro including debunking some of the reasons not to act.

I just wanted to add that he is thinking too small when when it comes to lawmakers making promises today regarding payments in the future.  That's not just the structural problem with our public pensions.  It lies at the heart of the entire modern entitlement state.

H/T Reihan Salam

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