Public employee pensions must be on the table

Reuters

City of Detroit pensioner David Sole wears a t-shirt, protesting cuts in city worker pensions in front of the Federal Court House in Detroit, Michigan October 28, 2013.

Article Highlights

  • Cities and states need the right to alter the rate at which public employees earn future benefits.

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  • Pensions are bigger, & their investments riskier, than ever before. Both costs & risks must be brought under control.

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  • Reforms should include greater risk-sharing between employers and employees.

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Public employee pensions pose increasing risks to state and local budgets. Pensions are bigger, and their investments riskier, than ever before. Both costs and risks must be brought under control. Modest benefit reductions, particularly for better-off retirees, should be on the table. This shouldn’t mean open season on public employees. But nationwide, public pensions are underfunded by $4 trillion or more, a figure that exceeds the explicit debt owed by cities and states. Many financially beleaguered cities are pushing the limits of “service insolvency,” in which rising pension and health costs force unacceptable reductions in basic services.

It’s easy to point to low average benefits for public employees, but these averages include workers who spent only a few years in government employment. In reality, public employee pensions are typically much – I repeat, much – more generous than those paid in the private sector. For instance, a full-career Detroit city employee would receive a traditional “defined-benefit” pension equal to two-thirds his final salary, for which he contributed nothing. Detroit workers could voluntarily contribute to a 401(k)-styled “defined-contribution” plan, on which the city guaranteed 7.9 percent annual returns even in bad times. In good times, both the defined-benefit and defined-contribution pensions received bonus payments. Add in Social Security, and it’s possible to earn more while retired than while working. It’s hard to argue that the typical Detroit taxpayer is doing as well.

The vast majority of public pension benefits owed should, and will, be paid. But in bankruptcy, nothing should be off the table. More important, cities and states need the right, which is taken for granted in the private sector, to alter the rate at which public employees earn future benefits. Reforms also should include greater risk-sharing between employers and employees. Wisconsin, for instance, bases cost of living adjustments, or COLAs, on plan performance, while Nevada splits all required contributions evenly between workers and the government. As unfortunate as Detroit’s circumstances may be, they start a conversation on how to make public pensions equitable and sustainable.

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