STUMP » Articles » A Proposal for Public Pension Reform: The Idea and Coming Attractions » 18 April 2018, 20:40

Where Stu & MP spout off about everything.

A Proposal for Public Pension Reform: The Idea and Coming Attractions  

by

18 April 2018, 20:40

The core idea for a public pension reform proposal can be seen here:

Embracing Shared Risk and Chapter 9 to Create Sustainable Public Pensions

I was one of the four authors on this piece, and here is an excerpt:

Unsustainable and Unaffordable Public Pensions Cannot be Solved by Raising Taxes or the Passage of Time, but There are Some Practical Solutions

by W. Gordon Hamlin, Jr.; Mary Pat Campbell; Andrew M. Silton; and James E. Spiotto

To date, no American state or local government has adopted a realistic solution to the public pension crisis. To date, they’ve failed to follow New Brunswick’s path-breaking shared risk public pension system. To date, no local government has proposed a prepackaged Chapter 9 bankruptcy. To date, public employees and retirees have insisted that increased taxes are the only pathway to achieving full funded status, even if that is thirty or more years away. To date, constitutional provisions prohibiting legislatures from impairing contracts have forced legislatures to target only future employees. To date, many legislatures have focused on switching as many employees and retirees as possible to the 401(k) world, which has left an entire generation of Americans unprepared for retirement and the problem unsolved.

It’s time to solve this policy dilemma, which is straining state and local budgets and crowding out vital investments in education, healthcare, and infrastructure. It’s time to stop believing that anything less than 100% funding is realistic and that future legislatures and taxpayers will fund any shortfall. It is time to account properly for future liabilities by adopting a risk-adjusted rate of return and budget with realistic contributions.

There are details in the piece (and links to various items), but this originated from a much longer paper that I co-authored with W. Gordon Hamlin, Jr. (not currently published, but more on that below.)

THE CORE IDEA

There are two parts to the idea:

  • A sustainable defined-benefit pension, with risk-sharing elements
  • A legal mechanism by which current pension liabilities can be transferred to this risk-sharing system

That’s pretty much it.

The actual unique part of this proposal is the legal mechanism, which obviously hasn’t been tried in the public sphere yet.

YES, in many states, this would involve amending the constitution. As I’ve mentioned many times before, especially with regards to Kentucky and Illinois.

CAN’T GET THERE FROM HERE

There are many elements feeding into the public pension crisis, but one of the main problems is that in some places, like Kentucky and Illinois (and New Jersey…), the hole is so deep that they can’t get out without cutting current benefits in some way, if only cutting COLAs.

But don’t take my word for it.

U.S. Pension Fund Collapse Isn’t a Distant Prospect. It Could Come in 5 Years.

Warnings about looming public pension disasters have regularly cropped up since the 1950s, pointing to problems 25 years or more down the line. To politicians and union leaders, the troubles were someone else’s predicament. Then crisis fatigue set in as the big problem remained down the road.

Today, the hard stop is five to 10 years away, 2 within the career plans of current officials. In the next decade, and probably within five years, some large states are going to face insolvency due to pensions, absent major changes.

…..
It’s important to distinguish between actuarial problems (the present value of projected future benefit payments exceeds the funds set aside to pay them plus projected future contributions) and cash problems (not having the money to send out this month’s checks). Actuarial problems are always debatable and usually involve the distant future. Cash shortfalls are undeniable and immediate.

New Jersey has $78 billion in its state pension fund, which is supposed to cover future payments with a present value of $280 billion. But that latter number is a projection. You can ignore it if you wish, or hope that soaring investment returns or a pandemic among retired workers will fix it. A more certain figure is that the $78 billion represents less than seven years of required cash payments.

This is why I’ve switched over to projecting cash flows. “Present value”, much less “actuarial present value” includes a lot of contentious items, so why not just look at what the cash actually does?

You should read the whole thing, but it’s not much longer than the excerpt (unless you want to read his 14 footnotes, which are substantive.)

There are various choices governments in these situations can make, but some are less practical and more destructive than others.

Governments do go out of business, you know. Failure is always a possibility.

I don’t care what your constitution says. It can’t prevent running out of money.

In many places, taxes are being raised to try to keep up with rising pension costs, and crowding out services. We see this most starkly in Harvey, Illinois.

It’s hard to get people to stay with a government that you’re paying a lot of money to for no services.

It would be nice if there were a legal mechanism by which these liabilities could be reduced.

Anyway, just putting that idea out there.

EXCERPTS FROM OUR PAPER

As I mentioned above, the first linked item is a summarized argument distilled from a much longer paper co-authored by Gordon Hamlin and me. We had hopes for a first publication venue, but that fell through, and we may be seeing parts of it in various places throughout the year.

I will be sampling some of the pieces of our argument, because I did quite a bit of research and made some graphs I quite like. Here is one:

Like it?

Well, I’ll discuss some of these issues in future posts. My main argument is that some plans are not sustainable, and need to be altered for current benefits.


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