NCPA - National Center for Policy Analysis


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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