The Limits of State Pension Reform
September 10, 2015
Many people see public employee pensions as a burden, they hear about deficits and outstanding liabilities. But few are aware that the main problem is political and not financial; in fact the main issue is how to combine democracy and fiscal responsibility.
The Great Recession gave state governments the opportunity to enact pension reform and address budget imbalances but the measures taken are not enough because the changes only affect future employees.
The main reasons for this inadequacy are:
- The main political players have strong incentives to avoid "pain" in the present and push costs into the future.
- Most voters have little understanding of defined-benefit pensions as they are discussed in complex actuarial language.
- Public sector unions and financial management firms rally against any kind of reform.
- Pension policy also gives politicians of both parties the means and motive to promise public employees more compensation in retirement.
In some cases, even if there is political will for pension reform, there are legal constraints that prohibit the modification of current employees' benefits, i.e. the California Rule.
These factors are real obstacles to any form of pension reform. However, some states like Rhode Island, Utah, Virginia and New Jersey have been able to carry them out. Conditions present in these states include: leaders willing to spend political capital, pre-existing fiscal conditions, lower legal barriers and restrained interest groups.
As demonstrated by those states, which opted for defined-contribution options or hybrid plans, reform can happen. The more states take this step, the less controversial it will become.
Source: Daniel DiSalvo. "It's the politics, stupid: The limits of pension reform" Washington Examiner, August 28, 2015.
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