NCPA - National Center for Policy Analysis

Congress' Pension Math Doesn't Add Up

January 19, 2012

Last week Sen. Orrin Hatch issued a report noting the rising unfunded liabilities of state and local defined benefit pension plans, and which illustrates the potential impact of those liabilities on the taxpayer, says Steven Malanga, a senior fellow at the Manhattan Institute.

  • Pointing out that local governments' unfunded retirement obligations may now approach $4 trillion, the Hatch report noted that the failure of a few big public sector pension plans could spark a credit "contagion" that would make it difficult for all governments in America to borrow money.
  • Federal safety-net programs like Medicaid and food stamps might be strained if retirees in government pensions saw their benefits cut sharply, as they have been in a few municipal bankruptcy cases.

Although defined benefit plans date back more than 100 years, when a few big employers like railroads began offering them, they were never widely used for very long.

Over time, more and more firms switched to 401(k) style pensions, where an employer makes an annual contribution to a retirement account for a worker and the employer's liability ends there.  Today, only about 20 percent of private workers are covered by defined benefit plans.

Only in one area did traditional pensions continue expanding, in government, where the taxpayer is the backstop when these plans get in trouble.  Today, some eight in ten public workers are covered by defined benefit plans, though governments have done such a poor job of funding their promises to workers that one analysis predicts that without reform the pension systems of 11 states would exhaust their assets by the end of this decade.

Instead of encouraging private and public employers to assume obligations that wind up crushing them, Congress ought to be pointing the way toward a system where the costs are transparent, the liabilities are not open-ended, and where retirees can count on plans that will remain solvent so that the money will be there for their retirement.

Source: Steven Malanga, "Congress' Pension Math Doesn't Add Up," Real Clear Markets, January 18, 2012.

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