Public Pension Reform Now!

Posted by Enrique on 09.07.2008

Empty promises

As you may be aware, government has a long history of making promises it can't keep. Naturally, it's easy for elected officials to make irresponsible guarantees because they're working with taxpayer dollars rather than their own money. But when these costly promises come due, government passes them on to the taxpayer.

One such promise is represented by public pension systems. Employees of state and local governments typically receive generous compensation and benefits as compared to private sector workers. In many cases, retired government workers are entitled to retire before 65, and receive pension payments until the day they die. These pensions are a very expensive, taxpayer-subsidized promise to public servants. It may not surprise you to know that state and local pension managers often hide the cost of these promises through nuanced accounting methods. The Washington Post reports:

Public pension funds generate money from worker contributions, government payments and the returns from investing that money. These funds pay an annual pension salary and health benefits to retirees and often their spouses for as long as they live. As state and local entities, pension funds are not subject to federal oversight and have wide latitude in how they estimate the cost of their future obligations.

One of the most important assumptions they use in their calculations concerns the rate at which a fund makes money on its investments. The better these investments fare, the more flush the fund. If a government projects a high rate of return, there is less need to tap taxpayer money to finance a shortfall. Most assume their investments will earn 8 percent interest.

That is about twice the market-based rate that private firms are allowed to use under federal regulations. Economists and some actuaries say public pension funds should use these market rates, which they argue are more realistic gauges of long-term returns from risk-free investments such as 30-year Treasury bonds. The rate on the 30-year Treasury was a little higher than 4 percent yesterday.

(Emphasis mine.) As far as hot-button issues go, public pension reform doesn't much interest the average voter – frankly, it's dreadfully boring. However, we always end up with the government we deserve, so we might want to start demanding pension transparency from our state and local officials. The Post article ends with a reminder of the kind of mentality that sets in when the government doesn't expect to be held responsible:

Other pension managers noted that fund returns have historically averaged about 8 percent per year for the past two decades. And because they do not face the possibility of going out of business, unlike firms in the private sector, they should be allowed more leeway in their rate of return assumptions.

Obviously, the reason governments can't go out of business is because they can use force to achieve their objectives. If a government needs more revenue, it raises taxes. Private businesses pass costs on to consumers all the time, but the consumer can choose to not buy a product or service if it's too expensive. A person can't choose to not pay taxes. So yes, a government can't go out of business – but that's a poor argument for giving government more leeway to abuse its power.

Still, we the people are ultimately responsible. If we're not going to hold our elected officials accountable when they make promises with our money, we have no one but ourselves to blame when the shinola hits the fan.