Interview: How to End the Public-Sector Pension Crisis

In this 8-minute interview, Adrian Moore, vice president of policy at Reason Foundation, talks with Reason TV’s editor in chief Nick Gillespie about the public pension crisis. Moore starts with the debt numbers: “Optimistic scenario: it’s $1 trillion dollars in unfunded liabilities… Much more realistic scenario: you’re looking at $2 trillion to $4 trillion.”

Moore then explains how important it is for states and cities to pay the annual required contributions. Not setting aside these required contributions each year creates unfunded liabilities, which compound at the assumed discount rate. “Places like New Jersey are not putting that money aside. They’re essentially saying ‘we’ll have to make up for that in the future without the interest earnings’. So it’s a compounding debt,” says Moore.

With regard to the size of pension costs, Moore explains: “If you go back to around 2000, a typical city, county, or state in the US would be paying around 15-20% of its total payroll for pensions. Fast-forward a decade later, after they’ve made all these unsustainable promises and failed to make payments, and you’ve got places where more than half of total payroll is going to pay for pensions.”

In the interview, Moore lists three kinds of problems that get states and municipalities into pension trouble:

– Not making pension contributions that are supposed to be made

– Assuming an unrealistic rate of return

– Ratcheting up pension benefits to unsustainable levels

When asked how public pensions have arrived at their current dismal state, Moore points at the inherent incentive problem. “It’s politics,” says Moore, “it’s easy to make promises that have to be paid for in the future… When you’re promising too high benefits or not making your payments, you’re basically saying: ‘someone in the future will get us out of this mess. I’m going to cash in now.'”

As to examples of successful pension reform, Moore mentions San Diego and San Jose as the “bright spots” that got the reform right.

To watch the interview, go here.