That’s One Reason

JUNE 5, 2012

A lot of people lost a lot of retirement dollars during the recession – and government investments were no exception. Most notably, pension funds for government employees went from being (what I would call) “partially unfunded” to “significantly underfunded.” Those are not the technical terms. But they set the stage for these two figures: 75% and 63%.

The first figure, 75%, is the funding level of the average government pension system in the US. The second? That’s Maryland, baby! We always like to stand out a little, and our current administration’s favorite way involves excessive spending, raising taxes, and running deficits whenever possible.

The Washington Examiner says that the unpredictable market is to blame for the shortfalls. And while it’s true that the recession played a role, the claim cannot (fairly) be made that this is the only reason. Let’s be honest: there are two other very significant reasons why government pension funds are so significantly underfunded.

<> We’re using very optimistic assumed rates of return. While the private economy is assuming an annual rate of return of a few (between 3 and 5) percent, the government “optimistically” assumes between 7 and 8%. This creates two problems: one visible and one invisible.

When we assume a higher rate of return than we actually get, we end up putting less money into the funds than we need to stay on track. That means our funding gap grows. That’s the visible problem. But it also means that the amounts we’re projecting we will need to add in the future are kept artificially low. That’s the invisible problem – and it only becomes slightly visible with each passing year that this continues.

<> We’re promising way too much. Public unions have been growing in strength for a long time in Maryland. And every time they get their way, retirement plans get a little more expensive. Politicians like to reward government employees as generously as they can, but recently the rewards offered have eclipsed what we can afford.

It is a rare private employer indeed that still offers employees defined benefit retirement plans. The free market has almost completely abandoned them because they are expensive and unsustainable. But nearly all public employees enjoy them, thanks to those powerful public unions. It’s nice for them, to be sure (and, likely, we’d all take advantage if we could), but it’s putting a strain on the Maryland taxpayer.

Yes, we can blame the volatile market for the state of our public pension funds. But we also need to address these two important issues if we don’t want this to be a recurring (and probably deteriorating) issue.

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