Study: Just stop funding public pensions

Thursday, October 7th, 2010

By FRANK KEEGAN – Hey citizen, listen up! Right now you personally owe public workers about $41,000 for pension benefits politicians and union leaders promised them but failed to fund. We have to pay it no matter what 'reforms' they impose now.

Here’s a novel approach to the trillions of dollars taxpayers owe state and municipal workers: Stop wasting money investing in their pensions now and simply raise taxes to pay when they retire.

Henning Bohn, a professor at University of California Santa Barbara, lays out this proposal in a study for the National Bureau of Economic Research.
In “Should Public Retirement Plans Be Fully Funded?” Bohn says it would be the best deal for taxpayers not to.
“In a model where most taxpayers hold debt and face intermediation costs, returns on pension assets are less than taxpayers’ cost of borrowing. Pension funding is costly and hence zero funding is optimal,” especially if the money is in risk-free investments required by the guaranteed payout.
“Put simply: Why should taxpayers vote to accumulate assets in a public retirement plan that buys Treasury notes yielding, say, 2% when they are paying 15% interest on their credit cards and 7% on car loans?”
More simply still: Taxing the 80 percent of households now paying high interest on loans so bureaucrats and money managers can pocket billions of dollars to underperform market averages on pension fund investments is a sucker deal for taxpayers and public workers.
Bohn, in 40 pages of dense prose and mind-boggling formulas, says he proves a fair deal is to leave that money in taxpayers' and public workers’ pockets now and let future citizens pay state and municipal retirement costs out of operating revenue when they come due.
Why worry now? Let the future take care of itself.
He does hint at a couple of problems with that. “Giving politicians discretion could undermine balanced budget restrictions and thus alter the political economy of state and local governments.”
That is exactly what has happened now. State and local politicians sneaked through the biggest tax increase in history without any debate, vote or public awareness.
They and the union bosses kept public workers and taxpayers docile and compliant by making false promises that would not be revealed until long after they enriched themselves and retired.
Bohn admits they got away with it because nobody was watching.
“Voters must monitor politicians who act as their agents. Credible information about local budgets is often unavailable or costly, e.g., requiring time to attend meetings. Each voter must monitor … multiple entities — the city, the county, the state. If politicians have no authority [to] incur debt, the potential damage from political favoritism, corruption, or other monitoring failures is bounded by current revenue, whereas damages can be huge if debt is allowed.”
Voters did not monitor. And in the past couple of decades, traditional news media companies ruthlessly cut coverage by the reporters who had been watchdogs for more than a century. The result is favoritism, corruption and damages are huge.
How huge? According to University of Chicago professor Robert Novy-Marx and Joshua Rauh of Northwestern University in an earlier NBER study, the tab probably is more than $4 trillion, based on what Bohn calls “fiscally conservative” and “populist” assumptions.
A less conservative and populist Pew Charitable Trusts study that merely accepted official government numbers as of 2007 put the debt at $1 trillion. Pew warned it will grow inexorably unless leaders took immediate drastic action. So far, leaders have barely acted at all.
The Government Accountability Office, even less conservative and populist than Pew, recently totaled official government numbers as of 2007 for promises state and local politicians made that somebody else must pay for, and found minimum long-term liability of $9.9 trillion that “cannot be adequately met by shifting burdens from one level of government to another.”
According to GAO’s urgent and widely ignored study, that means “closing the fiscal gap over the next 50 years would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3 percent reduction in state and local government current expenditures.”
Of course, GAO says, “Closing the fiscal gap through revenue increases would require action of a similar magnitude through increased state and local revenues.” But that would mean doubling taxes — already above 2007 peaks — every six years, which would soon eat the entire U.S. economy.
Bohn’s study does not say what we should do about that. And he doesn’t recommend a solution to the unpaid public employee retirement tab that politicians already ran up while nobody was watching.
To be safe, let us go with the conservative populist estimate.
That means each and every citizen who happens to be among the dwindling number of private sector employees paid less to do more, with no pension and a looted 401k, right now on top of all other debts and taxes owes public workers about $41,000.
Pay up, or they’ll take your house. That debt will never go away no matter what “reforms” politicians make in public pension plans now. And it’s getting bigger every day they fail to act.
We must force them to act. Now. Or replace them with leaders who will.
Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, and . [email protected]

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4 Responses to “Study: Just stop funding public pensions”

  1. […] “Should Public Retirement Plans Be Fully Funded?” he answers emphatically: […]

  2. […] An article by Frank Keegan of the Franklin Center for Government and Public Integrity cites a study done by UCSB professor Henning Bohn.  The professor claims it would be better not to fund government pension plans at all since the portfolio assets earn at a rate less than the cost of taxpayers’ borrowings.  In other words, pension assets’ rates of return will be less than the rates we pay on credit cards and car loans, so it would be better that we keep the money and borrow less and/or save more, as opposed to giving it to money managers to underperform the market. […]

  3. […] estimates of hidden state and municipal liabilities, including retirement promises, equals $41,000 for each private sector worker on top of all other taxes, fees and debt service. Bond markets have […]

  4. […] estimates of hidden state and municipal liabilities, including retirement promises, equals $41,000 for each private sector worker on top of all other taxes, fees and debt service. Bond markets have […]

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