If you are in a hole stop digging! Stop digging the government pension hole.

How about this for an idea? For every city, state or federal government that has a substantial deficit (we can fine tune the cutoff point later) let’s simply suspend the increase in retirement benefits for those currently accumulating them. Let’s not break the promises we have already made but stop writing even more checks that will bounce in the future. These unfunded liabilities are growing fast and there is simply not enough money stashed away to meet the obligations.

The government employee gets her current salary and non-retirement benefits but her retirement pay is frozen until the government gets its act together (in other words achieves a balanced budget).

While California goes deeper into debt each day, their retirement hole continues to deepen. And when California is eventually placed into receivership, then the US government will after much consternation step in to make good on the promised retirement payments. Keep in mind that if I buy an annuity from anyone other than AIG and they go bust then I get pennys or nothing on the dollar. But this is not the case if it is a traditional pension program which is managed by government and has an implied or legal guarantee from the US government.
The holes that our governments keep digging are our government defined-benefit pension promises. These promises are easy to make but hard (or impossible) to deliver on.

The other major advantage of this approach is that it might bring the government employee unions to the table actually trying to re-engineer the compensation of public employees. In most cases the hourly pay is not far out of line with the private sector. The problem is the benefit packages of public employees compared to the private sector is way out of whack. This would do wonders for balancing these budgets and would also provide a new focus on how much these current pension programs are costing the taxpayers. The one exception I would consider is the pension programs for our military that are structured much more reasonably and have zero payout unless a soldier puts in at least 20 years.

Eventually we need to move all government retirements (including the military) from defined-benefit (annuities) to defined-contribution (like 401k and IRA) programs. This is much easier to manage and removes the risk of politicians promising payments 30 years out that they have no intention of saving for.