Thursday, December 23, 2010

Municipal Pension Woes

Municipal bankruptcies are yet another ticking time bomb. Sometimes it seems like we have so many of them!
This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.
Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.
...
“Prichard is the future,” said Michael Aguirre, the former San Diego city attorney, who has called for San Diego to declare bankruptcy and restructure its own outsize pension obligations. “We’re all on the same conveyor belt. Prichard is just a little further down the road.”
...
Prichard’s pension plan was established by state law during the good times, in 1956, to supplement Social Security. By the standard of other public pension plans, and the six-figure pensions that draw outrage in places like California and New Jersey, it is not especially rich. Its biggest pension came to about $39,000 a year, for a retired fire chief with many years of service. The average retiree got around $12,000 a year. But the plan allowed workers to retire young, in their 50s. And its benefits were sweetened over time by the state legislature, which did not pay for the added benefits.
What are the lessons here?

  • Early retirement is bad news. Not economically sustainable. The big problem is that a goal of retirement income is certainty and safety. That makes sense. The problem is that the rates-of-return for an insured, lifetime, inflation-protected annuity are paltry. It's just the economics. It's not reasonable to expect that you can work for maybe 30 years, and enjoy a high retirement standard of living for 30 more. (Medical inflation of course greatly exacerbates that problem.)
  • Politicians live for the present moment. Nothing new in this insight, but it is a crushing problem. Even the best-designed, best-intentioned program is almost guaranteed to become corrupted over time. The opportunity to influence government expenditures are, to a politician, like drugs to an addict. And I don't mean that figuratively--all evidence seems to show that they simply can not resist raiding the cookie jar. All the more so at a national scale, when there is the opportunity to spend somebody else's money (ghost of Robert Byrd, are you listening?).

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