NCPA - National Center for Policy Analysis


May 4, 2006

Like many of the remaining traditional defined-benefit pension plans in the private sector, government pension plans -- federal, state and local -- are swimming in red ink, says Adam B. Summers of Reason.

Some examples:

  • About $295 billion in unfunded liabilities was reported by researchers at the National Council on Teacher Retirement.
  • The City of San Diego is now embroiled in its worst financial crisis ever, with an estimated pension deficit of $2 billion. The debt may require as much as one-third of the city's general fund.
  • Illinois taxpayers face a pension deficit estimated at $38 billion -- the worst in the nation.

In response to their pension funding problems, some governments are following the example of the private sector and switching to 401(k)-style defined-contribution retirement plans.

The plans offer many advantages, says Summers:

  • Because costs are known in advance, the budgeting process is much easier for state officials.
  • Government officials can still offer attractive compensation packages by increasing salaries or by increasing the level of the government's contribution, but they must ensure those compensation increases are paid for up front.

In addition, government officials should enact constitutional or charter amendments requiring voter approval of all government employee benefits, says Summers. This strategy has helped politically liberal San Francisco keep retirement costs in check while conservative areas such as San Diego and Orange County, California have been brought to the brink of financial ruin by the pension systems.

Source: Adam B. Summers, "Public-Sector Pension Crisis Worsens," Heartland, March 2006.


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