Monday’s Wall Street
Journal had an interesting opinion piece on “The Hidden Danger in Public
Pension Funds” (12/16/13, A13). The
point was that, especially in light of Detroit’s bankruptcy and the decision of
the court that public pensions are not sacrosanct, states and municipalities
have to rethink the whole pension system.
Frankly, that’s a good idea for both the public and the
private sector. The day of the defined
benefit plan may be gone . . . if it ever could have been said to be here at
all.
The article quite properly focused on the absolute necessity
for defined benefit plans to invest conservatively to protect the assets of the
plan, but also to ensure that the plan’s investments generate sufficient return
to provide enough cash to meet the promises that may have been made with
too-lavish a hand. After all, a public
pension plan does have one recourse that a private pension plan does not: it
can raise taxes to make up any shortfall.
. . . except that during periods of economic downturn when
conservative plan investments do not generate anywhere near enough income, the
tax base has also usually eroded to the point where squeezing any more out of
the taxpayer is simply not possible, even if it is a viable political option —
which it seldom is. Can you say “Tea
Party”?
What is the solution?
Some people think that the federal government should simply
bail out not merely public pension plans that are in trouble, but take over all
government functions directly. People
who advocate this and similar positions appear to believe that the federal
government can simply issue new money to meet all expenses. This will not only be more efficient, so the
argument often goes, but will eliminate the national debt and bring universal
prosperity.
The problem is that, while the U.S. Constitution explicitly
prohibits states from emitting bills of credit — government debt instruments
intended to be used as money (and there has never been a question about
municipalities), the federal government does not have the power under the
Constitution to do it, either.
The explicit intent of the framers of the Constitution was,
in fact, to prevent the federal government from being able to create
money. The words “and emit bills of credit”
were specifically removed from Article 1, Section 8 of the Constitution to
preclude Congress having any such power.
Obviously, then, simply having the federal government create
the money it needs at will should not even be discussed. It’s not an option, whether we’re talking
meeting deficits for public pensions, or anything else.
So is there an answer?
Yes. In the short term, all
public pension plans should shift from defined benefit plans to defined
contribution plans. The only promise in
a defined contribution plan is that a participant will receive the vested
balance in his or her accounts.
Period. A defined contribution
plan cannot, by its nature, be un- or underfunded. The amounts may be insufficient to meet
participants’ retirement needs, but the assets exist, and the vested account balances
will be paid out.
A participant who pays attention to the Summary Annual
Report and Statement of Participation all qualified retirement plans are
required to distribute to all participants annually should have plenty of
advance warning that the plan might not pay enough to meet retirement needs. Bad?
Yes. Disastrous? No.
The long-term solution, however, is to get away from the
traditional concept of retirement plans completely — possibly even the concept
of retirement. Every child, woman, and
man, whether in the private sector or the public sector, must participate as an
owner in the capital growth of the economy, possibly through an aggressive program of expanded capital ownership such as Capital Homesteading.
In this way, not only will people enjoy capital incomes to supplement or
even replace labor incomes throughout their lives, the interests of the private
and the public sectors will coincide, and they will come together in
solidarity.
#30#