Some Steps for Congress on Pension Reform

In this Wall Street Journal column Reason’s Carl DeMaio explains how severely unsustainable are many state and local government pension plans.

A 2011 study by the Congressional Research Service pegged the combined liabilities faced by state and local pension funds at over $3 trillion. That is more than all the bonded debt officially listed on state and local balance sheets combined. To put the issue in perspective, all the federal tax hikes approved by Congress on Jan. 1 would pay less than 20% of America’s state and local pension debt over the next 10 years.

Naturally, solving that problem is mostly a state and local issue.

But there are a few useful things Congress can do. It seems odd these days to ask Congress to do something fiscally responsible, since that seems so far from their agenda, but the fixes have to start somewhere.

First, Carl points out that

Washington has tightly regulated private pension systems since the 1974 Employee Retirement Income Security Act, but that law exempted the pension systems of state and local governments. Four decades and $3 trillion in debt later, it is clear Congress made a mistake.

Second,

Scores of state and local governments are using “pension obligation bonds” to bail out troubled pension programs on the risky wager that they can beat Wall Street investment returns. There is $64 billion in such bond debt outstanding in the U.S., with more expected to flood the market this year.

Borrowing to make payments into a fund for future pension obligations is like me borrowing from my bank to pay my credit card. Bad financial management. Unfortunately, federal tax policies encourage pension obligation bonds, and Carl recommends changing that.

Read the whole thing here.