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April 02, 2012

"Pension costs are crushing local governments"

A Stanford professor--and former Democratic assemblyman--looks at the chickens coming home to roost in California:

Among cities and counties with pension systems outside of CalPERS, i.e., "independent" systems, pension expenditures have increased 11.4 percent annually since 1999, faster than any other category. Based on economic and finance standards used everywhere except in the public pension world, the top 24 independent pension systems are collectively $136 billion in debt and have only 54 cents for every dollar they owe. In nearly every municipality, employee pensions are being prioritized over libraries, parks, street maintenance, health care and public safety.

You wouldn't know it from the debate in Sacramento, but this isn't a partisan issue. Rather, this is about the crumbling of basic services that citizens expect from their government. . . . 

Pension system administrators also assumed an annual investment rate of return of nearly 8 percent, the equivalent of the stock market doubling in value at least every nine years. (By the way, they still assume this today – which is equivalent to betting that the Dow will reach 11,000,000 by 2100.)

But maybe there's hope: "Bankruptcy, the Best Way to Deal With Public Unions".


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Good analysis, but the recommendations are unwise. The only real solution is to forget about Paygo pension plans and have employees invest in individual retirement accounts with employer contributions. No accounting gimmickry, no political negotiations, no unreasonable assumed rates of return. What is you see is what you get. You want 8% return? Take on the risk.

This has the added benefit of circumventing the issue of whether to allow people to retire at 50 with most benefits. With individual accounts, people are free to retire at 50 -- with peanuts in their account.

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