Reforming Public Pensions

States in America currently face a $4 trillion unfunded pension liability crisis. Years of unfunded promises and actions from legislators to public sector workers have left a troubling scenario for the fiscal state of state governments. In response, states are raising taxes or cutting services while refusing to acknowledge the issue of public pensions. An effective solution to the public pension crisis is to cut government services, the size of government, slash current pensions, and ensure that public sector workers, rather than taxpayers, contribute the largest portions to their public pensions.

           

However, unions are certainly unwilling to compromise on this issue because many feel that they are being attacked by “Wall Street” and the “rich”; blanket accusations that do not address their role in the crises. Members of these public sector unions are “guaranteed a certain level of payout based on a formula.” Pension funds invest government and employer contributed funds; those funds then make a prediction about the system’s overall rate of return. However, in their current state when these investments do poorly, unfunded obligations go up and politicians either increase taxes to cover those costs, or deal with these issues later.

            

In the case of California, the “Board of Regents of the University of California (UC) voted 14–7 to raise tuition by as much as 5 percent a year unless the state legislature provides it with at least $100 million more a year. This, after tuitions, already doubled over the past decade.” What drove these tuition increases? Well, this resulted from unfunded pension liabilities and rising healthcare costs for public workers.

           

During the 1990s, the university had a surplus budget and refused to make more annual payments to its pension fund. Instead, it relied on optimistic predictions for the rate of returns for their investments. Consequently, the system is now underfunded with assets just covering only 0.3 percent of the predicted costs of these obligations. Younger workers are forced to bear the brunt of these expenses because they must pay greater contributions to a public pension system while facing the risk of their government defaulting on their debt obligations.  

Clearly, state governments must overlook the interests of public-sector unions and realize that taxpayers are the ones who cover public costs. Ultimately, a reduction of government services, slashing pensions, and requiring greater public worker contributions into their pensions will solve this crisis.