• On public pensions

    First, public sector pension plans are more generous than comparable plans in the private sector. They tend to pay higher benefits per year of service and encourage younger retirement ages. Because of these plan characteristics, these plans cost more than private sector pension plans. Second, many governmental units have not provided sufficient annual contributions to their pension funds and as a result, their plans are underfunded and in some cases dramatically so. The economic downturn and decline in equity values has exacerbated the poor funding of these plans. Third, compared to reported liabilities, public sector plans are even more poorly funded than official estimates indicated due to the use of discount rates that are much higher than the rate that should be used to value accrued liabilities.

    Fourth, public pension fund managers do not appear to invest in a manner consistent with asset‐liability matching. The portfolios of public pension systems bear some resemblance to those of university endowments and foundations, despite the fact that public pensions have even less ability to scale back spending if risky assets underperform expectations. […]

    [T]he cost of retiree health plans is soaring and, in most states, and these plans are completely pay‐as‐you‐go. The variation in the cost of health plans across the states is much greater than the variation in pension plans. Similar to private employers, employers in the public sector are struggling with the cost of these plans and are implementing an assortment of policy changes in an attempt to slow the growth rate of their costs.

    That’s from the conclusion of a new NBER working paper, The Economics of State and Local Pensions, by Jeffrey R. Brown, Robert Clark, and Joshua Rauh.

    UPDATE: I changed the title.

    • In this list, the first item is a feature of public sector pensions, not a flaw. One may argue that public pensions should be smaller, but it is not the size of the pensions that is causing problems in states like Wisconsin.

      If the other problems listed above were addressed – the pensions were adequately funded, were realistic interest rates used in valuation and were asset-liability matching properly employed – the pensions would not create problems.

      On the other hand, were public pensions half or one-third the size they currently are, you would still have problems if the pensions were unfunded and otherwise poorly run.

    • I agree with some of these points. But that’s a pretty partial list. Public employees are not responsible for the failures of elected policymakers to properly fund these benefits or to chase high returns through excessive risk-taking.

      Also, public employees gave up other components of their compensation to secure these benefits. Most of my own professional peers in government receive lower salaries than their private-sector counterparts. They have important jobs. They should be adequately compensated.

      While some renegotiation is obviously required, I think public employees are bearing a bit too much of the blame here.

      • Just FYI: I knew this NBER paper would be of interest, which is why I posted an excerpt of the conclusion. I made no editorial comment because I do not consider myself qualified to draw any evidence-based conclusions. There’s a lot more in the paper and interested readers should read the whole thing.