The Trouble with Public Pensions

As I have previously blogged, the trouble with public pensions is the enormous unfunded liability they pose to many government budgets, but as the Las Vegas Review-Journal points out, the problems reach deeper than that:

Defined-benefit plans stem from a bad moment in time in which employers — and now unions — cared for employees like children incapable of planning for their own retirements. Over time, these plans metastasized into grotesque shadows of their initial good intention.

In a perfect world, defined-benefit plans get the math right in terms of how much a government employee must put in and how much the taxpayer must put in. The rules for retirement are reasonably set and never abused; costs for health care remain predictable; and defined-benefit plan funds are wisely and conservatively invested to keep the plan solvent regardless of the number of employees in the plan.

Virtually every state in the nation has broken those fundamentals, producing what is called an “unfunded liability.” Whatever the shortfall in a state’s defined-benefit plan for the retirement and health care of public workers, the taxpayer — both present and future — must pay.

After listing a few examples that will spike your blood pressure, Mr. Frederick gets closer to the heart of the matter:

Now there’s a growing cry for wholesale reform. Not the kind of reform that works around the edges of the abused existing system, but transformation into a better a way — a 401(k) plan.

In a 401(k), the employee and the employer contribute to a worker’s retirement plan under guidelines set forth by the federal government. That money resides within the account of each worker. The money belongs to the worker, and that worker controls how it is invested.

Upon retirement, instead of getting a monthly check, all of the money in the 401(k) plan belongs to the worker. It can be used in any way the worker wants. It can be passed on to heirs or charity, unlike defined-benefit plans that bank on a certain number of workers dying before they collect all the money they put into the system. (In Illinois, they’ll need about half their teachers to die today to get right-side up.)

The No. 1 attribute of 401(k) plans is they are perfectly in balance from day one because employers and employees pay as they go. There is no future unfunded liability.

I would argue that, funding issue aside, the best attribute of this idea is returning to a property ownership mentality. Public pensions, instead of offering security, offer dependency on a system that has been corrupted. Instead of hollow promises, a 401(k) offers each worker their own property – their retirement savings. As P.J. O’Rourke said, “Property rights are the deed we have to ownership of ourselves.” If retirement isn’t the time to enjoy ownership of yourself, when is?

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3 Responses to The Trouble with Public Pensions

  1. olemike says:

    You are absolutely correct. It is critical that state governments convert from a
    defined benefit plan to a defined contribution plan. Otherwise, the state will all go broke.

    • Drae says:

      Thanks! Converting public pensions would go a long way towards getting people away from the nanny state and back to taking responsibility for themselves.

  2. Matt says:

    here is a great example of how the pension system has failed to keep up with the way we work: “Elk River Police Chief Jeff Beahen is retiring and going to work for the state.”

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