NCPA - National Center for Policy Analysis

More Than Good Enough for Government Work

May 8, 2012

State lawmakers face an uphill battle in trying to bring their governments' pension costs under control, largely due to opposition from government employee unions.  According to Northwestern University finance professor Joshua Rauh, public pensions nationwide are underfunded by a total of $4.4 trillion, despite efforts by many state governments to reform pension programs, says Ivan Osorio, the editorial director and a labor policy analyst at the Competitive Enterprise Institute.

Continued effort will be required if state legislators are to bring this liability within sustainable bounds.  To do this, they will have to target four crucial areas for reform.

Pension payouts based on final year pay.

  • This allows some public employees to engage in a practice known as "spiking," which involves employees racking up long hours of overtime during their last year on the job.
  • The result can be that employees receive more in retirement than they did on the job.
  • The solution would be to base benefits off career averages instead of the final year.

Collective bargaining and binding arbitration.

  • The practice allows public employees to ratchet up benefits by controlling both sides of the negotiating table.
  • Elected officials often receive enormous amounts of funding and support from well-funded and organized unions, and this creates hazardous conflicts of interest when it comes to discussing compensation increases.

Politicized pension fund boards.

  • These boards fail to make profit-maximizing investments by seeking political or social objectives.
  • The California Public Employees' Retirement System, for example, sacrificed an estimated $1 billion in potential gains by opting to eliminate investments in tobacco firms on non-financial grounds.

Faulty accounting standards.

  • Accounting standards should be updated with sensible rules that account for risk.
  • Many state pension managers base their funding projections on overly optimistic expectations of investment returns, resulting in too little being set aside for future beneficiaries.

Source: Ivan Osorio, "More Than Good Enough for Government Work," The American, April 25, 2012.

For text:


Browse more articles on Tax and Spending Issues