Government Pensions: The Next Major Financial Crisis

But, of course, no one said that. They just voted down each attempt to trim the budget proposal, which is currently some $19 million out of balance. So, government workers will get a pay hike in 2010, during what our president calls "the worst economic crisis since the Great Depression." They'll also get an average of $5,500 extra per government employee placed in their retirement fund so their defined benefit payout is secure.

However, the benefit plans, designed to keep government workers on a smooth upward path while you and I ride the roller coaster, are about to run out of gas in the middle of a fiscal desert.

According a story in the Sunday Washington Post, "Steep Losses Pose Crisis for Pensions":

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.

The Post gives examples of the looming crisis from California and New Mexico, to Virginia, Maryland, and Pennsylvania. Some fund managers, desperate to make up for whopping losses, have returned to the risky behaviors which contributed to the crisis in the first place. The story concludes by noting that the Ohio public school teachers' pension system was 41 years behind schedule in funding its existing obligations. That was before the current economic downturn. The most recent annual report gives a new estimate of how long it would take Ohio to get the fund back on track. According to experts, the estimate is "infinity."

So, what's the solution to this huge unfunded liability that could literally bankrupt cities, counties, states, and the taxpayers who support them?

Common sense would dictate that when projected expenses outstrip projected revenues you can either decrease the former, increase the latter, or do some combination of both. But as the Washington Post story points out, those options don't solve the long-term problem: elected officials have made promises that can't be kept except under the bluest of blue-sky projections.

The only long-term viable alternative would be to get governments out of the business of managing retirement accounts. In my humble opinion, here's how that might be accomplished:

1) Newly hired government workers can receive either a portable defined contribution retirement plan -- a 401(k) for example -- or none at all. In the latter case, we simply pay them a market wage and allow them to handle their own retirement planning. No waiting to become "vested" in the plan. Your money is yours from the start. (Of course, union leaders will complain that many workers aren't qualified to handle such a responsibility -- planning their own financial futures. But remember, these are the same bright and industrious government workers who we have to continually bribe to keep them from jumping to the private sector. As you know, anyone can hire a financial planner for a modest fee.)

2) All legacy government workers could remain in the defined benefit system, but their accumulated nest egg could be progressively transferred into their own accounts. They could then choose the amount of risk with which they feel comfortable based on their projected proximity to retirement.

Your local government may have to borrow money to make these payouts, since many pension funds may soon be insolvent. In the long term, the added debt will be more manageable, and less long-lasting, than the old defined benefit pension obligations.

There is no way forward without pain. There is a way forward without catastrophe, which lays a foundation for fiscal responsibility, but it requires courage.

Of course, we could simply allow these pension funds to go into insolvency, in which case, the federal government would step in and bail them out, taking over their management. But if anyone thinks that the federal government will have more success than your state or county in managing these funds, I have a bridge in the Mojave Desert that I'd like to sell him.