Josh Smith
A recent New York Times article discusses something we have talked about on Show-Me Daily: the unrealistically rosy forecasts of public pension funds. If words like "forecast" and "public pension" make your eyes glaze over, hold on for the kicker — if you are a Missouri taxpayer, this is something that will likely cost you money soon, or result in your city or state going bankrupt. From the article (emphasis added):
In New York, the city’s chief actuary, Robert North, has proposed lowering the assumed rate of return for the city’s five pension funds to 7 percent from 8 percent, which would be one of the sharpest reductions by a public pension fund in the United States. But that change would mean finding an additional $1.9 billion for the pension system every year, a huge amount for a city already depositing more than a tenth of its budget — $7.3 billion a year — into the funds.

Ailing pension systems have been among the factors that have recently driven struggling cities into Chapter 9 bankruptcy. Such bankruptcies are rare, but economists warn that more are likely in the coming years.

These problems are not confined to New York City. As the New York Times article says, this is a near-term problem for "public retirement systems from Alaska to Maine." This expensive problem is manifesting in Missouri, and in particular in Saint Louis with the recent discussion of firefighter pensions.

Public employee pensions tend to use an outdated benefits structure that relies on growth assumptions that are unrealistic in the current climate. Public employee retirees are receiving pension benefits that assume growth rates that just do not match reality. This means that current employees are paying into a system that, in its current state, cannot afford to pay them when they retire. Something has to give. Either their benefits will be reduced, the current employees will be asked (or required) to contribute more — taking a salary cut to support their retired peers — or the taxpayers will be tapped year after year to plug the holes in the broken pension system.

Lowering the forecasted growth rate from 8 percent to 7 percent per year is not enough to improve this serious problem. And the longer Missouri policymakers wait to make politically unpopular decisions that will improve the long-term picture, the worse the finances become. Let's not be like Greece and curry favor with unrealistic future promises to pay. Instead, let's lead the way on substantial public pension reform at the state and local level by switching all public employees to defined contribution 401(k) retirement plans.

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