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.