The Coming Public-Sector Pension Crisis

From the Cincinnati Enquirer, a report on the Queen City's criminally negligent funding of its workers' pension plan:

Although reforms that council adopted in June have shaved tens of millions of dollars off the city's long-term retirement costs, the revised projections make it clear that City Hall still faces daunting challenges over the next decade in funding pension and health benefits for nearly 7,800 workers and retirees.

To keep pace with projected expenses, the city's $26.4 million contribution to the pension fund this year would need to rise to $84 million in 2010—a scenario that council members and other city leaders concede is unrealistic.

With the city facing a 2010 budget deficit estimated at $51.5 million, a shortfall that City Manager Milton Dohoney Jr. has warned is all but certain to force layoffs and worker furloughs, council likely will find it difficult to allocate much more to the pension fund than it did this year.

More here. Exactly this sort of scenario is playing out in a locality near you.

The causes of such shortfalls include bad stock market returns and a lackadaisical approach more generally to fully funding future commitments (why rob from today's funds to pay for tomorrow's bills, if tomorrow may never come or if a stock market boom will make it easier to fund it? and a governmental unit can always raise future taxes, right?). Read Jon Entine's February 2009 Reason cover story on public-sector pensions to get a sense of how off things are.

But a huge part is in the nature of the retirement and health plans, especially in the public sector. Retiring Cincinnati workers get up to 90 percent of the average of their last few years' of work and have generally small co-pay portions on benefits. More to the point, the defined benefit plan is yesterday's model, and one that was predicated upon many more workers per beneficiary than is likely to be seen ever again. Which is one reason why virtually all new retirement plans are based on a defined-contribution model, where companies and workers fully fund (or, same thing, are fully responsible for) their retirement benefits via a 401(k) or similar system. 

The only real question left is who gets stuck with most or all of the bill for the sort of old-school program in Cincinnati and most other governmental units around the country: The people in it or the rest of us.