The way state and local governments have always accounted for their pension costs is backwards, suggests a new working paper, and its proposal for reversing that represents a sea change for public finance.
It’s a well-known fact: municipal pension funding is in crisis, leaving workers and retirees at risk of running out of money in old age, even as “legacy” commitments eat into city budgets, leaving little money for taxpayer services.Put in plainer English, there’s no reason that municipalities need to have money in the bank to pay the entirety of their calculated current and future benefits now.
State and local liabilities can also be likened to the federal government’s deficit and debt, Sheiner said in an interview with MarketWatch. Most economists think that as long as those numbers stay constant as a share of the economy, it’s not problematic. “Keep it stable” is a vastly different form of math than what city budgets use now. Every year, an actuary calculates how much a municipality must pay based on assumed returns from investments and contribution amounts from current employees, in order to fully fund the entire pension for all current employees and retirees.
“This is a very political issue,” Sheiner told MarketWatch, “and it’s nerdy and complex. People don’t understand how to think about public debt either. People are used to thinking that the government’s budget is like their household budget, and that state and local governments are not supposed to have debt.”
Among them: governments shifting new hires to defined-contribution plans, similar to private-sector 401 plans, rather than defined-benefit plans. Such plans aren’t just more affordable, they may also help diffuse some of the resentment taxpayers feel when government workers get fat retirement checks.
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