So many U.S. states are struggling with unsustainable public pension costs that many are probably wondering: Is an honest, fiscally sound, publicly administered pension plan possible, or are all such efforts doomed to regulatory capture, union abuse, and co-optation by politicians? At least one example suggests that, given sufficient discipline and scrutiny, pension plans can be made to work in the 21st century. An article in the New York Times today praises the Dutch version:
Dutch pensions are scrupulously funded, unlike many United States plans, and are required to tally their liabilities with brutal honesty, using a method that is common in the financial-services industry but rejected by American public pension funds.
The Dutch system rests on the idea that each generation should pay its own costs — and that the costs must be measured accurately if that is to happen. After the financial collapse of 2008, workers and retirees in the Netherlands took the bitter medicine needed to rebuild their collective nest eggs quickly, with higher contributions from workers and benefit cuts for pensioners.[…]
Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. A significant downside to this method is that it lets pension systems take advantage of market gains today, but pushes the risk of losses into the future, for others to cope with.
The United States also, as the Times notes, allows for local and state governments to treat each year as a new “year 1” in a long-term plan. The Dutch system, by contrast, eschews such deceptive accounting gimmicks and encourages an honest democratic debate among the generations:
The young people were eager to keep taking investment risk, to take advantage of their long time horizon. But the retirees now wanted absolute safety, which meant investing in risk-free, cashlike assets. If all the money remained pooled, young people said, the aggressive investment returns they wanted would be diluted by the pittance that cashlike assets pay….It’s a debate that is rarely, if ever, heard in the United States.
The United States could likewise benefit from some forthright negotiation between workers and retirees. The Dutch-style solution to pension solvency, to borrow from G.K. Chesterton, “hasn’t been tried and found wanting; it has been found difficult and not tried.” We highly recommend you read the whole thing.