Public Pensions Crisis

Public employee pensions in the United States were historically reserved for wounded combat veterans who could no longer provide for themselves as a result of their service to the country. Few would disagree with such an honorable goal.

In the early 20^th Century, though, things changed. Public pensions were created partly to entice public employees to work for less, with the understanding that additional compensation would come in retirement. From that initial starting point, public employee pensions have become a tremendous burden on government budgets. In A History of Public Sector Pensions in the United States, authors Robert Clark, Lee Craig, and Jack Wilson attribute the growth of and difference in public pensions (as opposed to private retirement accounts) to “(1) rent seeking by public employees, (2) patronage versus merit in public sector hiring practices, and (3) Progressive Era politics"

For the last ninety years, a growing pool of public employees have been promised defined benefit pensions which commit pension funds and governments to provide guaranteed retirement funds. Private sector retirements, on the other hand, are largely based on a defined contribution plan which employees and employers may contribute to, but the amount available for retirement is dependent upon how well the investment fund performed. By guaranteeing set retirement amounts to public employees, taxpayers are essentially the insurance for under-performing pension funds that may not be able to meet their retirement payment obligations.

Prior to the financial crisis of 2008-2009, many pension funds were already underfunded. As a result of the downturn, the situation has grown much worse. As of 2010, aggregate estimates of public employee shortfalls in funding range from roughly $500 billion to nearly $4 trillion. Many of those estimates use an 8% return on investment for the pension funds, which is at or less than what the majority of pension funds predict to earn moving forward.

Government officials across the United States are now dealing with communities and even states that cannot afford to cover the generous retirement benefits of public workers like police officers and firefighters. It is becoming a crisis that will likely play out over the next ten to fifteen years. This pension crisis could bankrupt cities, counties, and even state governments if something isn’t done soon, but the solutions aren’t terribly popular. Legislators have the option to raise taxes, defer further payments, or default upon their obligations by declaring bankruptcy. Realistically, public workers will have to share the burden, or there will be extreme hikes in taxes.

A relatively quiet problem, as compared to the national economic meltdown, the pension crisis must be addressed by taxpayers and governments before massive ramifications occur. Read along to find out what’s happening across the nation.