How Long to Solve Funding Crisis in Public Pension Systems? Try “Infinity.”

David Cho has an excellent article in the Washington Post today on the looming crisis in state and local public pension system funding that should be required reading for fiscal hawks. Reason Foundation warned about the gathering pension storm in a 2005 study before the latest recession decimated pension fund holdings and exacerbated the problem.

Cho’s article is well worth a read for some insights into the tight corner policymakers have backed themselves into through decades of promising lavish, unsustainable benefits to public sector hirees that the system cannot possibly support. In effect, policymakers in a bygone era promised the moon to public employees, but left the gory details of how to deliver on those promises to future generations that are now stuck with a Ponzi-eqsue mess it cannot afford. Between then and now, policymakers along the way saw a situation ripe for the political picking and moved to increase retiree benefits, while simultaneously allowing governments to pay less in to the system every year. That’s a recipe for insolvency if I’ve ever seen one.

Cho’s article highlights many examples of hard-hit public pensions from across the country, but the last one caught my eyeââ?¬â?it really says it all:

In Ohio, for instance, the teachers pension system reported that it would take 41 years for its investments to catch up with the costs of meeting its obligations to retirees. That was before the worst of the financial crisis.

During the last fiscal year, Ohio’s fund lost 31 percent. Its most recent annual report detailed how long it would now take for its investments to put the fund back on track. Officials simply said: “Infinity.”

The article suggests that public pensions face two bad choices: cutting retiree benefits (the political and legal challenges to which would be enormous) or take greater risks with current fund holdings (which already burned many funds in the most recent downturn). I’d suggest before even thinking through the underfunding issue, the first step must be to stop digging the hole any deeper by shifting to defined-contribution, 401-k style systems and away from the disastrous defined-benefit systems so ubiquitous today.

For more on the public pension crisis, see colleague Adam Summers’ recent op-ed on public pension crises in California, a state that knows all too well the phenomenon of promising the moon without having the funding to sustain it long-term.