mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Truce in the Pension Wars
Can Public Pensions Be Fair to Later Generations?

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.

Features Icon
show comments
  • Boritz

    “given sufficient discipline and scrutiny”

    This was a practical approach for our great-grand parents, not for us.  You may as well say: given a sufficient pot of gold at the end of the rainbow.

  • Corlyss

    “Is an honest, fiscally sound, publicly administered pension plan possible,”

    Here’s the deal: people either save for retirement, or they spend everything they make and then some to support the infamous “consumer economy.” No nation can have it both ways. None. We see the consequences of the post WW2 attitude that consumerism was the answer to thousands of years of economic cycles. It’s essentially a lie. People can have such honest, fiscally sound, publicly administered pensions – the federal government’s civil service has one – but they have to save a lot more than they have, a lot more than they have been willing to save, and a lot more than the economy can stand. That’s why the original lock-box scheme of Social Security was very quickly abandoned – it was taking too much money out of the economy. And let’s face it: there were only two reasons FDR came up with SS: one was to capture a lot of money the administration’s floundering recovery programs and the other was to lash up voters to the “generous” Democratic party forever.

    “are all such efforts doomed to regulatory capture, union abuse, and co-optation by politicians”

    • Andrew Allison

      Of course, as the Dutch have demonstrated, an honest, fiscally sound, publicly administered pension plan is possible. It does, however, require a recognition of fiscal reality on the part of present and future retirees. Given the conspicuous absence thereof in the U.S.A., we can confidently look forward to tears from the pensioner victims.

  • Andrew Allison

    The fundamental fallacy in this argument is that today’s public employee retirees and the unions representing the current ones give a rat’s rear end about their (or anybody else’s) grandchildren, let alone the solvency of the entities which employed/employs them.

  • Anthony

    Public pensions are “the fortunes of those who have no fortune.” Perhaps capitalized pension plans may have to reconfigure in some instances as PAYGO systems (based on principle of intergenerational solidarity – today’s workers pay benefits to today’s retirees in the hope that their children will pay their benefits tomorrow).

    • Andrew Allison

      Intergenerational solidarity doesn’t work because increased longevity and retiree-to-worker ratios mean that there’s less and less revenue to pay more and more pensions. At the end of the day, workers must save for their own retirements, either individually or through fully-funded pension plans. The first step toward fixing the public pensions disaster is to impose the fiduciary and funding requirements for private pension plans. The second is to convince future retirees that their promised pensions are not going to materialize and that they had better start saving.

  • qet

    The only practical solution in the USA is the route being followed by Stockton, CA, and that will require the appeals courts in all circuits to uphold the decision of the district court recently handed down. If more cities file for bankruptcy protection and use federal bankruptcy laws to reduce pension contributions, then we can expect to see some furious lobbying in Congress to change those rules. Municipalities would be wise to file today and take their chances under the current legal regime. The idea that there would be a “mass exodus” of municipal employees, in this economy, is risible.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service