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"How to Avert a Public-Pension Crisis"

A dire warning about the state of public pensions. Read it now and you won't be have to ask in the near future, "Why didn't economists warn us about this?"

If state and local governments do not take steps to comprehensively address pension funding shortfalls, managing public pensions will become an increasingly odious challenge, leading to heightened budgetary pressure and more strife between public workers and taxpayers. For a generation now, the people managing pensions have tried to have their cake and eat it too, promising guaranteed benefits and constant taxpayer contributions with professional investing covering the bulk of benefit costs. But it is simply not sustainable to offer fixed benefits and contributions while also relying on risky investments. . . .

Much can be learned from the best funded plans, like those in South Dakota, New York, Wisconsin, and Tennessee. Plans in each of these states are better than 90% funded at this point because policymakers have been proactive in adjusting important assumptions, closing funding gaps quickly, and developing risk-sharing mechanisms that can fairly adjust contributions or benefits as needed. These states demonstrate that it is possible to sustainably manage a defined-benefit pension plan.

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