[quote=EconProf]Long ago a French economist named Bastiat warned us to guard against “what is seen compared to what is not seen” in public policy making. I think it applies especially to government pensions.
Rather than ask what is “fair” or unfair–very ambiguous and easily contested word–let us agree that what is really needed is honest and transparent accounting. If office-holders were held to the same accounting standards as the private sector, most of our pension woes would never have appeared.
A pension is simply part of overall compensation when one is hired. They are promised a package of goods that include pay, working conditions, various costly items like health care, paid vacations, etc., and a promise to make future cash payments upon retirement in the form of a pension. All except the last are easily accounted for and totaled up to tell all parties the cost of hiring this employee.
Honest accounting would require the employer, whether city council, school district, or state, to set aside the appropriate amount out of the current budget to pay this future obligation. The amount would depend upon many tricky assumptions about the future: investment returns, lifespans at promised age of retirement, formula defining how pension benefit relates to earnings, etc. Just because these are hard to quantify does not mean we should dodge them.
Politicians have gamed the system by ignoring the long-run costs, and making their short-term budgeting look good and get a boost at the next election. What is not seen is the long-run obligations taxpayers are building up which must eventually be faced. Unions have been more far-thinking than the politicians and the public, and have won these grandiose promises in part because they are more savvy about what is seen vs. what is not seen. The accounting rules that apply to the private sector need to apply equally to the public sector, and the money set aside accordingly.[/quote]
Could not agree more.
FWIW, I think the Federal Reserve is the #1 culprit behind the “pension crisis,” and the “financial crisis.” Their policies — of not restraining markets that have clearly taken on far too much risk…and then “stimulating” (via artificially suppressed interest rates) when bubbles burst — have made it nearly impossible to accurately assess risks and invest in a responsible way. Investors are basically *forced* to take on too much risk during the low interest and/or bubble years, and are led to believe that the Fed will cover them tracks when things fail. The pension funds have gone deeper and deeper into “alternative investments” (I’m not even going into all the fraud and corruption there) because of the Fed, which I think is a HUGE mistake. Add to that the opaque derivatives market, which means that these investors either need to get into derivatives themselves, or risk not matching returns with risks. It’s a cluster.
