Circular Logic on Gov’t Pensions


In this morning’s Denver Post editorial, explaining why government employees should only temporarily be asked to take more partial responsibility for their own retirement, comes this remarkable claim:

But it shouldn’t be a long-term fix. Shifting the makeup of the pension funds could adversely affect the financial soundness of PERA.

That’s because employee and employer contributions are treated differently. The money that employees put in the system goes with them if they leave the system. If the fund mix gets too out of whack, it could be a financial problem.

This is a classic example of thinking inside the fiscal box they’ve put the rest of us in.  These pensions – the ones in question – are defined benefit plans.  As has been pointed out in a number of places this morning, Colorado is uncommonly generous with the percentage of an employee’s income it tries to replace in pensions.

At a minimum, shouldn’t that obligation be either contingent on the employee leaving his money with the plan?  If not, if they have the right to take that money with them, then ought not the pension plan’s obligation be reduced, proportional to the amount funded by the employee?  If it’s the employee’s money, then, well, it’s the employee’s money, and if they want to be responsible for investing half of their retirement money on their own, then they should live with the consequences of that.  It certainly doesn’t make any sense for the plan to have to shoulder more of the burden for an employee who leaves before retirement.

The real problem here is that it’s a defined obligation plan in the first place, and that it’s less than fully-funded.  If the plan were fully-funded, if every dollar of future obligation were already invested for, then this wouldn’t be a problem.  It’s complicated by the fact that none of these plans is fully-funded, so all of them rely on current contributions to pay current obligations, rather than socking that money away under the account for the individual.

It’s a result of lousy accounting having had a meet cute with lousy political incentives starting about 10 years ago.  It’s no longer sustainable, and eventually we’re going to have to convert all of these plans over to defined benefit plans.  If we can’t do that in one fell swoop, we can at least start by having public employees permanently assume a greater responsibility for their own retirement.

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