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Public employee pensions are a ticking fiscal time bomb. Nearly every state in the nation is struggling to reform their broken pension plans. For many years, public sector unions have over promised government workers lucrative pensions that they cannot afford to pay. This has created a looming crisis for state budgets and taxpayers. It could be even worse than officials are predicting.
Official estimates claim that state and local pension plans are underfunded—or overpromised—by roughly $1 trillion. But as Cato Institute scholar Chris Edwards says “these estimates greatly understate the poor shape of pensions because they rely on optimistic assumptions to value future liabilities, a practice Warren Buffet has called ‘accounting nonsense.” A study by University of Chicago Professor Robert Novy-Marx and Northwestern University Professor Joshua Rauh has found that state and local pension funds are underfunded-- or overpromised--by a whopping $3.2 trillion.
The American taxpayer could be on the hook to bailout government employee pension plans. This looming bailout needs to be paid closer attention. Last year, Senator Bob Casey (D-PA) introduced a bill costing taxpayers $165 billion to bailout troubled union pension funds. According to Washington Examiner writer Mark Hemingway,
The mother of all taxpayer bailouts is right around the corner. Union bosses want taxpayers to foot the cost for bailing out the labor organizations’ many failing pension plans that millions of their members are counting on to ‘be there’ when they retire. Unfortunately, the average union pension plan has only enough money to cover 62 percent of its financial obligations.
Why should taxpayers be forced to bailout public sector unions? Private sector workers generally receive far less benefits than government employees. We should not be on the hook to bailout severely mismanaged public sector pension plans. Many government pension plans have engaged in dubious behavior such as understating liabilities and overstating asset growth rates. Bailing out union pension plans will reward fiscal recklessness and the poor decisions that created the problem in the first place.
Fortunately, there’s some hope. In the new Congress, Rep. Chaffetz (R-UT) has reintroduced his resolution to oppose a federal bailout of public employee pension plans. Furthermore, the resolution would encourage states to adopt defined contribution plans to replace defined benefit plans. Regarding the looming fiscal crisis he stated,
Another wave of debt problems is coming our way. State and local government employee pension funds have unfunded liabilities of more than $3 trillion, and many states will not be able to deliver on promised benefits to government employees. Many of these states will undoubtedly be coming to the federal government for bailouts.
Rep. Chaffetz has seen the success of defined contribution plans in his own state. Last March, Utah switched to these 401(k) style plans for new state and municipal workers. During the stock market crash in 2008, the state pension fund lost 22 percent of their assets. The state’s pension plans were in a terrible shape until Sen. Dan Liljenquist (R-UT 23rd District) reformed the system. Since then, the state contributes 10 percent (12 percent for public safety workers and fireworkers) of the new worker’s salary to the defined contribution plan. Workers are still free to choose a defined benefit plan if they wish. But most seem to prefer the benefits of owning their personal 401 (K) style pension plan.
The results have been astounding. Polls show that the majority of Utah voters support the pension reform. The Wall Street Journal reports,
The reform has benefits for taxpayers and public employees. Workers own their retirement account and can carry it to another job. They also benefit because politicians can no longer steal from the pension plan to pay for other government spending. As for taxpayers, the reform will eventually slash state pension liabilities in half and they no longer bear the risk of having to pay higher taxes if the stock market declines.
Over a dozen more states appear to be interested in the Sen. Liljenquist's successful plan. Montana could be next to adopt the plan. The defined contribution plan has been a win for taxpayers, state workers and state budgets. We need to take a lesson from Utah’s public pension reform.