Skip to: Content
Skip to: Site Navigation
Skip to: Search


Opinion

A day of reckoning for public pensions: The bills are due, the coffers are empty

Public pensions are driving state and local governments into debt at an unsustainable rate. America must face this fiscal time bomb or these dream benefits will become a nightmare.

By Elaine L. Chao / October 1, 2010



Washington

In 1967, Dustin Hoffman’s character in “The Graduate” received a single word of advice for his future: “Plastics!” If Hollywood were to remake that movie today, the updated scene would offer two words of counsel: “Government job!”

Skip to next paragraph

After all, a number of recent studies conclude that federal workers earn 20 to 30 percent more per hour than their private sector counterparts. And where local, state, and federal government workers really come out ahead isn’t just in pay; it’s in the benefits. Most private sector workers can only dream of getting the generous lifetime pension and health benefits typical of government service.

These dream benefits are fast becoming a nightmare for taxpayers. Federal pension payouts roll into the $13 trillion national debt. Washington seems little concerned about that, because there’s no urgency to balance the budget.

But most state and local governments are required to produce balanced budgets, and they find themselves increasingly hard-pressed to satisfy their pension obligations.

Unfunded pension promises

For the past few decades, many local and state governments evaded these requirements, using an array of accounting gimmicks and rosy economic predictions to routinely understate pension fund liabilities and overstate assets. All the while, cozy arrangements between politicians and public employee unions fueled pension benefit increases. According to a study by the Pew Center, state and local governments today face at least $1 trillion of unfunded pension promises.

The problem is exacerbated by significant differences between the laws governing public pensions and those in the private sector.

Private sector pensions are required by federal law (Employee Retirement Income Security Act) to conform to certain minimum pension funding rules. These rules require more accurate measurement of pension liabilities and assets and prevent companies with significantly underfunded pension plans from making new promises they can’t afford to keep. State and local government plans are not subject to these federal laws, and many failed to take it upon themselves to responsibly ensure that they would be able to make good on their promises.

The Pew Center study concluded that, during the last decade, only about one-third of states consistently made adequate annual contributions to their pension funds. Moreover, it found that “many states shortchanged their pension plans in both good times and bad.”

Permissions