Thursday, September 16, 2010

Pension Reform - Half-Baked Proposal

In an Op-ed at, Richard Riordan and Alexander Rubalcava propose a "Race to the Top" initiative aimed at State and Municipal Pension fund reforms.

The proposal makes sense - have the federal government offer a way to reduce interest payments and guarantee the funds in exchange for much needed reforms aimed at increasing transparency and solvency. Their point that the federal government is already going to be holding the bag on the $1T+ in unfunded liabilities of all the TBTF pensions, so we might as well compel the funds to act more in our interests, is eminently true, and largely unappreciated in the public discourse.

The only issue I take is that they position their proposals to shore up government pensions as a solution to the situation of underfunding. The problem as I see it is that there are pensions at all. The truth is, a pension is by definition underfunded. Pensions have always been a device used by spineless managers and politicans to defer current operating costs by converting them into future liabilities - someone else's problem. Why would someone employ a pension (defined benefit plans) if they didn't intend to underfund it? It would be much less risky for workers to accept the pension contributions (defined contribution plans) and establish themselves an independent investment vehicle, but that would mean employers would have to pay every worker all the money they earned for that time period. Instead former managers, government and private, vastly preferred writing I.O.U.s with an accounting cost of capital of zero (I believe this to be the case, but am not a pension accounting expert).

GM kicked this can down the road for decades, and we all know how that story ended. The State and Muni pensions are next, though they are likely to get funded 100 cents on the dollar. While the taxpayer, local, state and federal, may not be able to dodge this bullet, I think any serious reform proposal for pensions must prevent the politicians and public unions from reloading the gun to our heads.

Private companies already eschew the pension , with most companies trying to wind them down and offering 401K type plans instead. If pension reform is going to be a "race to the top", I certainly hope the finish line is considered pension abolition. I realize it may take years, but we should at least be heading in that direction.

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