Pension Air Castles

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Lowenstein bemoans the failure of pensions, because he thinks they’re a good idea if properly managed. The solution for the government pensions already promised? Lowenstein says governments have to tighten their belts by reducing benefits and/or raising taxes.

Roger Lowenstein addresses “The Long, Sorry Tale of Pension Promises” in a recently published Wall Street Journal piece.

He harks back to the problem in private businesses like Studebaker. In 1963, it was struggling to survive a competitive auto market. It couldn’t afford to increase wages, so it promised future pension increases instead (which it couldn’t afford, either). When the operation closed later that year, worker pensions for the most part dissolved into air. Congress eventually responded with the Employee Retirement Income Security Act of 1974, which required private companies to pay for pension insurance and actually pay into pension accounts.

This didn’t address the problem with public pensions, which hadn’t promised unrealistic increases until collective bargaining came on the scene. Lowenstein explains:

“Private pensions gradually faded as an issue because many employers with pension plans failed, and newer companies (read: Google) never started them. But the problem with cities and states has mushroomed. As of last year, public plans are unfunded by a cool $1 trillion. Illinois is a poster child: $100 billion in the hole. Plans in Connecticut and Kentucky are in bad shape, ditto Chicago, Pittsburgh, the bankrupt San Bernardino, Calif., and many other cities.

The temptation for governments to negotiate unrealistic benefits was even greater than in the private sphere. Elected officials knew that, by the time benefits came due, they would be out of office. Union officials knew it, too. Once benefits were agreed to, cities and states chose to skimp on funding. Politically, it was always preferable to build the extra school or staff the additional fire station than to squirrel away more pension money.”

Lowenstein bemoans the failure of pensions, because he thinks they’re a good idea if properly managed. The solution for the government pensions already promised? Lowenstein says governments have to tighten their belts by reducing benefits and/or raising taxes. He suggests penalizing government’s bond sales if they don’t pay in to pension funds.

“The point isn’t to punish public retirees,” writes Lowenstein. “The point is that, when governments make contractual promises, they ought to fund them.”

Not only should governments fund what they promised as Lowenstein says – they need to think twice before making promises in the first place.

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