NCPA - National Center for Policy Analysis

PENSION SYSTEMS ACROSS AMERICA ARE IN DIRE STRAITS

February 15, 2005

Public and private sector pension systems are going bankrupt across the country for one simple reason: people make poor money managing decisions when they don't have to suffer the consequences, according to economists Matt Fong and George Passantino.

Defined-benefit programs, whether run by corporate executives, union leaders or government officials, are facing billions in unfunded liabilities:

  • Nationally, it is estimated that there is $400 billion to $450 billion in unfunded liabilities in private pension plans.
  • In 2004, the government agency that insures private pension plans, the Pension Benefit Guarantee Corporation (PBGC), had a $23 billion deficit, up from $11.2 billion the year before.
  • The California Teacher Retirement System has more than $23 billion in unfunded liabilities.
  • Alaska's pension plan is $5.2 billion in the red, while the cities of San Diego and Houston are facing shortfalls of $2 billion and $1.5 billion.

Fong and Passatino say defined-benefit systems have created a potential financial crisis for taxpayers because they encourage reckless behavior:

  • Corporate executives cave in to union demands for higher retirement benefits, knowing excessive pension deals won't hurt them in the short-term because they won't be around when the bill comes due.
  • Politicians authorize expensive retirement benefits to get votes from powerful public employee unions; taxpayers.

In 1999, former California governor Gray Davis boosted public-employee pension benefits dramatically -- allowing many to retire at 50 or 55 with 90 percent of their salary for life -- without almost any debate. Sold as a "cost-free" measure, the change cost the state $10 billion in added liabilities over 20 years.

Source: Matt Fong and George Passantino, "Pension Debt Continues to Grow in Both Public and Private Sectors," Investor's Business Daily, February 8, 2005.

 

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