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Taxpayers are already bailing out auto companies and banks and, before this recession is over, they’ll be bailing out public pension plans. These plans are losing money by the millions and billions—a $1 trillion loss combined—but that doesn’t mean retired government employees will see their pensions shrink.
Unlike many private sector retirement programs that can disappear with companies or 401(k) plans that can dwindle to nearly nil, public pension systems are defined-benefit programs. By law, governments must guarantee public retirees a fixed, lifetime income.
The costs to state and local governments are tremendous. But until the stock crash, returns on investments kept most funds flush with money. Today, however, it’s the losses that are adding up as both stock values drop and real estate ventures crash.
According to the National Institute on Retirement Security, from 1993 to 2006, public employees contributed 10.8 percent of pension fund balances, state and local governments contributed 19.6 percent, and the market and other investments 69.6 percent. The market is no longer picking up its large share, and that means that to meet future fund obligations, either public employees or state and local governments will need to contribute more.
Public employees are well-educated, well organized, and with easy access to policy makers. States and municipalities might make some headway in modifying pension systems to reduce costs, but the bottom line is that taxpayers had better brace themselves.
This commentary is based on a longer article in the latest issue of Research Reports, available free to AIER subscribers or $2 for non-members. Also in this issue:
- Ask the Expert: Stimulus for Accountants. This article grapples with the tax implications of a $250 stimulus payment to Social Security recipients.
- At the Crossing Point: Research Fellow Walker Todd writes about a convergence of trends that may signal the Federal Reserve has gone too far.
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