California cities and counties pension programs are underfunded by $28 billion

What do we do about our public employee pensions?

Why not change these retirement programs from defined contribution plans (traditional pensions) to defined benefit plans (IRAs and 401Ks).  Virtually all US employers have eliminated their public pension programs and replaced them with 401K programs.  The only exceptions are government and public utilities which can maintain these pensions because they face little or no competition and can generally pass on the costs to their ratepayers.

But defined benefit programs have universally gotten governments into big problems.  It is just too easy for politicians to garner favor with their public employee unions with pension benefits far above the private sector.  And when times turn tough, they find themselves with commitments that they have no chance of meeting.

The cities and counties in California are about $28 billion underfunded for what they have promised.  And this does not even consider the massive underfunding for the state workers in California.

So here is my suggestion.  First replace all public pensions with programs where the government contributes a certain amount each month to the employee’s retirement plan and the employee also contributes a certain amount each month.  In good times the government can choose to increase their contributions and in bad times they can reduce their contributions.  Private companies don not feel locked into a given pay system but government seems incapable of adjusting compensation down (they are good at ratcheting it up).

And what do we do with the $28 billion deficit?  Split in some form between the local government (via borrowing), the state (also via borrowing), the federal government (also via borrowing after all they have been guaranteeing pension for years) and finally discount the amount of cash going into every employees account.  For those over 70, no discount, for those from 60-60 say a 5% discount, down to those 20-29 say a 25% discount.  If you were a politician I would add a further 25% discount since you were asleep at the wheel to begin with. 

Public pensions are like other public spending and public debt, it is easy for politicians to borrow from tomorrow to satisfy today’s unions and it eventually catches up.

Posted via email from John's posterous