Doing Public Pensions the Right Way

21Nov/108

Doing Public Pensions the Right Way

Long version here from Girard Miller at Governing.com. A separate report from the Government Finance Officers Association is here.

Short version:

1. No crazy benefits
2. No crazy assets
3. Pay for benefits when they accrue (and not after the person has retired), and make sure employees have skin in the game
4. Get real about benefit assumptions (e.g., asset return assumptions, retirement ages, etc.)

Of course, the problem is that for many public pension plans, it's way too late to do this. As per Dan's earlier post, there's a nice little cycle going on where the politicians goose the pay and benefits for themselves and public unions, and the public unions make sure these pols get re-elected (or provide a soft landing should they lose office).

Miller had a followup where he talked about adjusting retirement ages, or at least adjusting benefits downward for actuarial equivalence for early retirement. I have various technical questions about this. But this is all tinkering on the edges.

The inherent problem - that of very interested actors "choosing" their bosses (via electoral effort) and politicians voting up their own benefits and that of the public unions, I have a modest proposal:

1. No pensions at all, of any kind, for politicians.

2. No public unions.

I figure that would be a good start.

Just as a starting point.

Meep

Meep is a member of the Irish Catholic mafia, having a suspiciously high number of green-eyed, red-haired friends. While she doesn’t have red hair herself [except when she goes into the sun (rare for any vampire)], she does have green eyes. She’s a raving Papist and is a life actuary on the side [i.e., she counts dead people]. An amateur pain-in-the-ass [willing to go pro!], she likes covering retirement, mortality, math, and education issues.

Tagged as: governance, public pensions, retirement age Leave a comment

Comments (8) Trackbacks (1) ( subscribe to comments on this post )

Americaneocon
November 21st, 2010 - 20:42

You’re linked at this epic roundup: ‘Korean Air Rule 5 – Special Linkmaster Smith Farewell Edition!’.

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EM
November 21st, 2010 - 22:25

Benefits+compensation for any public sector employee should be legally prohibited form being any larger than the median values for equivalent private sector employees. (This, of course, would not be a problem for our military men and women, as they are the only sector of government that already makes far less than their private sector equivalents.)

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Meep
November 22nd, 2010 - 06:15

Don’t disagree EM. But the problem is keeping the stuff down.

First the political power needs to be broken up. Public unions must go.

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Don Levit
November 22nd, 2010 - 10:37

EM:
The retiree plans for all federal employees are “funded” just like Social Security.
That means 100% of the trust funds represent government bonds, which do not represent a store of wealth.
To redeem the Treasuries, the government does so like any other federal expenditure, such as for battleships – by paying from current revenues and debt held by the public.
The government actually states that the federal employees’ pension plan is not operated like a pensioin plan!
I have excerpts and links from reputable government web sites for anyone who is interested.
Don Levit

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Frank Keegan
November 22nd, 2010 - 10:37

As long as politicians and public employees can deny fiscal truth, they will try to put off the inevitable until they crash us all. Truth in accounting laws would at least force them to admit how bad the situation really is.
http://www.franklincenterhq.org/1974/what%e2%80%99s-truth-got-to-do-with-it-don%e2%80%99t-ask-bond-raters-or-governments/

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Meep
November 22nd, 2010 - 12:11

Don: That’s actually not totally correct. Public pensions do have real assets (unlike the Social Security Trust Fund), but the problem is they are woefully too small in many cases.

Not all public plans are bankrupt, by the way. And generally where they are not you’ll see:
1. No crazy benefits
2. No crazy assets
3. Appropriate contributions made at appropriate times
4. Reasonable assumptions for valuations

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Don Levit
November 22nd, 2010 - 12:47

Meep:
I didn’t make myself clear. You are correct that they have real assets.
I was contrasting the average percentage of corporate and government bonds in state pensions, 23.4%, with 100% of unfunded Treasuries in Social Security, Medicare, and the federal employees’ retirement plans.
That means, for states. on average, 75.6% of assets are real assets, like stocks, etc.
The states have accounted and funded for their liabilities much better than the federal government.
Even the treasuries in state plans are funded, because this is considered public debt, between the federal government and an outside entity.
In contrast, the Social Security trust fund has unfunded treasuries, in that it is considered debt that it owes itself, intragovernmental debt, not debt held by the public.
It is debt that it owes itself, for the Treasury owes the trust fund, which is like the left hand owing the right hand.
Many economists discount intragovernmental debt, and count only debt held by the public – for how serious would you be about paying a debt back to yourself (the Treasury and the Social Security trust fund are subsets of the set, the federal government).
Again, I can provide good governmental excerpts and links to support my statements, if anyone is interested.
Don Levit

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Meep
November 22nd, 2010 - 14:44

Sure, Don. Just know that I am an actuary (though not a pension actuary), so I’m going to be a nit-picker.

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