Public pension primer from Brookings

OK, so the workings of public pensions isn't exactly a sexy topic for holiday party conversation. But I've Tweeted about them a few times recently, noting that state and local governments across the country are dealing with growing shortfalls in their pension funds - meaning that government money going into the pension fund isn't keeping up with the amount of money that's due to be paid out.

 

And because the problem isn't going away anytime soon - unless there's a miraculous boom in the stock market - you can expect to hear about more strained government budgets and more calls for public pension reform in the coming months.

 

To help make sense of the rhetoric around what can be a hard-to-understand topic, the Brookings Institution published a primer on public pension funding deficits - how big is the problem, what caused it and how it can be solved.

 

The first few pages are full of some pretty dense explanations of how pension obligations are calculated. The basic point is that there is a wide range of estimates on the total shortfall of all U.S. state and local pension funds, and no matter which one you pick, the problem is serious and getting worse.

 

Starting on page 10, the report explores the causes of the problem, identifying several factors:

 

• Bad accounting. The actual liability, meaning the forecast of what will be needed to pay all future claims, has been underestated, which has led to more generout benefits packages and lower funding.
• Risky investments. If pension funds invest too heavily in higher-interest products like stocks, the returns could be higher, but you run the risk of weak stock markets wiping out pension funds. That's what happened across the country during this recession.
• Short-term political horizons. "Pension deficits can be easy for politicians to hide or ignore for their four- or eight-year term in office, which was likely a factor in the growth of the problem over many years," the report states. Some states even made the deliberate choice of skipping minimum contributions, either because the fund had plenty of money (in good times) or because budgets were tight (in bad times).

Possible solutions include:

• Cutting benefits or raising employee contributions for new workers
• Reducing inflation indexing for existing benefits
• Switching to a defined-benefit plan, like a 401(k)
• Raising taxes and increase contributions
• Cutting general government services and use the money for increased contributions
• Seeking a federal bailout

Read the entire report and this York Daily Record story from November on Pennsylvania's pension shortfall, and you'll be able to offer some informed opinions on public pension deficits that might actually turn some heads at the next holiday party.

 

- Dan Fink