Mega Moral Hazard — Pensions

In recent weeks there have been a number of articles exposing the “moral hazard” of defined-benefit pension plans. This editorial in the Washington Post (registration required), does as good a job as any in highlighting the nature of the problem. The parties that make decisions related to pension funding have no incentive to act responsibly. As the article puts it: “The politics of pension reform are pernicious, as last year’s bad bill showed: Company managers don’t want to pay more into their pension plans; labor unions don’t want money that could be used for wages to go for pensions; both sides are content with large, unfunded pension promises, underwritten by taxpayers.” Now, of course, this article is talking about the quasi-governmental Pension Benefit Guaranty Corporation (PBGC), which covers private DB plans. The very same logic (or lack thereof) plagues public pension funds.