In a system, gone completely loony, pension plans in seven state will be busted by 2020 yet the states keep hiring public workers. Please consider Pension Plans Go Broke as Public Payrolls Expand.

Seven states will run out of money to pay public pensions by 2020. That hasn’t stopped them from hiring new employees.



The seven are Illinois, Connecticut, Indiana, New Jersey, Hawaii, Louisiana and Oklahoma, according to Joshua D. Rauh of the Kellogg School of Management at Northwestern University. Combined, they added 9,700 workers to both state and local government payrolls between December 2007 and April of this year, says the U.S. Bureau of Labor Statistics.



Generous and bloated are the terms that have been used to describe them; critics have set up websites to pillory those government retirees who enjoy $100,000-plus annual pensions and other goodies, such as health-care benefits for themselves and their families for life.



“Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities” is the title of Rauh’s recent study. It’s a provocative piece of work, especially for one of its tables, titled, “When Might State Pension Funds Run Dry?”

Pension Security Bonds: A New Plan to Address the Pension Crisis

As I have blogged previously, states are making financial promises that they cannot possibly keep, and the bills are coming due much sooner than you think. Unless action is taken soon, the federal government will face intense pressure to bail out the affected states, at a price tag of $1 trillion or more.



The outline of the plan is that the federal government should cut a deal with states. They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years — if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities:



1. The state must close its defined benefit plans to new employees under a “soft freeze” and agree not to start any new defined benefit plans for at least 30 years.



2. The state must annually make exactly its actuarially required contribution (ARC) left over from the existing underfunded plans; only the amount of that ARC will be subsidized.



3. The state must include its new workers Social Security, and provide them with an adequate defined contribution plan, again for at least 30 years. To this end, the federal government should start a Thrift Savings Program for state workers and operate it alongside the existing Thrift Savings Program for federal workers.



The tax subsidies for these new Pension Security Bonds would work like Build America Bonds, with the federal government paying 35% of all coupon payments directly to the state. The cost of this subsidy will be in large part offset by the gains to the Social Security system of bringing in new state workers.

Pension Security Bonds

Mish,



The employer/employee contributions for the defined contribution plan must be in line with private sector compensation practices.



On the bonds... if we do nothing, we'll be in a situation 8 years from now where states are begging the federal government for a multi-trillion dollar bailout. I'd like a clear "just say no" message, but I fear that message isn't credible. When it comes to down to it, politicians will inevitably cave in and waste loads of money on the bailout... they do it every time.



My plan gives states the incentives to clean up their act now. Pensions are THE thing that is bankrupting states. The choice is a $75 billion federal incentive today (unfortunate) or a multi-trillion dollar federal bailout 8 years from now (catastrophic). I'm going with the incentive.



Josh

Main Points of Agreement

20 States out of Money by 2025

Fantasyland Projections