The Politics of Pension Reform

Many believe that pension reform mostly concerns technical problems: funded levels, actuarial assumptions, discount rates, investment returns, etc. Daniel DiSalvo, a senior fellow at the Manhattan Institute, in a recent paper explains why it’s not the case. The deepest problem faced by troubled public pensions is political, not technical.

The political incentives surrounding public pensions are what ultimately destabilize those plans. Most voters have little understanding of how public pensions work, while voters who are public employees are better informed and have more interest in expanding pension benefits. Both public-sector unions and financial-management firms favor boosting pensions, and both groups are often more powerful and well established than tax-payer groups. The defined benefit model, which creates a long time lag between pension promises and payouts, encourages politicians to overpromise and underfund pension benefits, pushing substantial costs into the future. In many states, the legal framework heavily restricts reducing prospective benefits. And finally, the public and policymakers have become more comfortable with borrowing from future generations to pay for present expenses. All of these factors constitute a political dynamic that drives public pensions away from fiscal sustainability.

The recent pension crisis triggered by the Great Recession has forced many state and local governments to re-examine and modify their pension plans. However, most of the changes are largely symbolic adjustments rather than genuine, long-term reforms. The key elements that determine the effectiveness of reform include leadership, preexisting fiscal conditions, policy design, political alignments, and legal barriers.

To read the full paper, go here.