We need to eliminate all public employee defined benefit pensions and replace them with defined contribution plans. Pensions are simply too risky for both taxpayers and retirees. Politicians can't be counted on to fund pensions properly. Many local governments will go bankrupt in the coming decades due to inability to meet pension obligations, which will result in cuts to critical government services and retirees forced by bankruptcy judges to take benefit cuts.

>retirees forced by bankruptcy judges to take benefit cuts

These people have already sold their services for a promised benefit which is now not being given to them. If there is bankruptcy it should come at extreme costs to the extent that the voters in the location feel pain equal to those who are having their pensions cut. Clawbacks, criminal convictions, liquidations, ensuring that the pain is not felt just by those who are having their benefits stolen and given to someone else.

That's not how bankruptcy laws work. Voters will suffer some pain in the form of municipal service cuts and possibly higher taxes. But if current services are cut too far or taxes raised significantly then residents and businesses will simply leave, thereby further eroding the tax base and making it even harder to meet pension obligations.

This is reality and no amount of whining about fairness or past promises will change it.

>That's not how bankruptcy laws work.

Bankruptcy laws should not allow a private entity to go through bankruptcy and continue to operate while discharging its debts. The same should apply to public entities as well. That they may currently allow this is something we need to fix.

If we cannot ensure debts to be met under law, then we should forbid the debts from existing to begin with.

That comment displays a rather shocking ignorance of the intent behind bankruptcy laws. When a private company is insolvent it's almost always better for the creditors, employees, and other stakeholders to work things out in reorganization rather than liquidating. Removing the option to reorganize would increase the cost of capital, reduce economic growth, and increase unemployment.

While municipal corporations can dissolve, that wouldn't solve anything. County and state governments can't afford to pick up pension obligations on behalf of cities. And we'll probably find that some entire states such as Illinois can't pay their pensions. There's no way for a whole state to simply stop existing.

> We need to eliminate all public employee defined benefit pensions and replace them with defined contribution plans

How does this solve the problem? 401(k)s in the private sector have been a complete disaster. Most 401(k)s are also hugely underfunded.

As far as I can tell, the only thing defined contribution plans accomplish is shifting the blame for underfunding and poor investment performance to employees, while enriching the financial companies that collect account and transaction fees.

[1] https://www.fool.com/retirement/general/2016/01/26/20-retire...

[2] https://www.wsj.com/articles/SB10001424052748703959604576152...

> Most 401(k)s are also hugely underfunded.

That's a disingenious way to state that.

Individuals have control over their own IRA/401(k) contributions. They are "fully funded" up to whatever that individual wants them to be, and that amount of money will be available to them when they retire (+/- investment gains/losses). You can argue that people aren't putting enough money in their IRA or 401(k)s to retire, but that's not "hugely underfunded", that's short-sightedness or circumstance.

Pensions are hugely underfunded because states haven't been setting aside enough for promised benefits. The equivalent would be me sending a check to my IRA or 401(k) institution and them taking 20-30% of that money intended for my retirement account and putting it somewhere else instead. That's fraud and it's illegal in the private sector (c.f. Bernie Madoff). Makes you wonder whether it should be illegal in the public sector, too?

> You can argue that people aren't putting enough money in their IRA or 401(k)s to retire, but that's not "hugely underfunded", that's short-sightedness or circumstance.

The end result is the same: most people don't have enough money to live comfortably on in retirement. That's what I mean by shifting blame. Sure, it's not the government's fault you don't have a healthy retirement account, they didn't rob your pension fund, you were just "shortsighted".

There's no mystery here, we've known since the institution of Social Security that almost nobody saves enough money for retirement if left to their own devices. Shifting to (nominally) employee-controlled defined-contribution plans just means we have only ourselves to blame for what will be the same societal problem: impoverished retirees.

And the problem will be just as hard to solve, because it will be seen as an issue of people failing to be responsible, so why should we bail them out?

Isn't "it worked in the past" pretty much the foundation of all investment advice? Based on what else can the average guy invest his 401k?

Regarding public pensions they should just adapt to reality and fund them higher. This was willful negligence for a long time.

Not when you're taking small data samples. If you look at past years of investment, you'll either have a sample size too small to be meaningful, or your start lumping years that don't reflect today's realities into the mix.

These investments are basically saying, "the market will always get 10% return", so we're going to put future tax payers on the hook for 10% returns. The average guy investing his 401k doesn't get guaranteed results at the expense of other people's work.

Even if there is a historical 10% return that holds, that's still going to produce underfunded (and overfunded) pensions based upon fluctuation in yearly returns and population dynamics (like if an unusually large number retire in a down year).

Then there is the pension spiking, and maybe even no consideration that people are paying into the pension at low rates but tend to retire at high pay rates.

As individual you can't really compensate for the update and downs of the market but a pension system with an eye on the long term could do this. Sometimes it's overfunded, sometimes underfunded but in the end it will converge to the average.

> Based on what else can the average guy invest his 401k?

That's a determination the average guy has to make, and he doesn't run the risk of bankrupting the entire state when he misjudges his risk profile.

I agree funding our way out of this mess is the right solution, with the caveat that there might not be enough local revenue to do so, in which case the pension should be transferred to the US Pension Guarantee Corp and funded by the federal government.

What about preventing this from happening going forward?

That's largely already happening with the shift from defined benefit plans to defined contribution plans.

It is not necessarily a better outcome for the employees but it has better alignment of incentives and doesn't create obligations for future taxpayers.

Are there any state governments that have shifted to defined contribution, especially for the politically untouchable judges and police pensions?

For me it's closer to "it worked in the past but even if it doesn't I'm going to be in the same boat as basically everyone else". Which is very different than the kind of promises pensions make.

Or stop raiding pensions and other tax receipts to pay for other underfunded government obligations (resulting from inane tax cuts that only benefit the very wealthy)?

Typically pensions themselves are the largest underfunded government obligation - consider California, where Gray Davis passed a retroactive pension benefits increase with a reduction in pension funding. At the national level, the math is different because of the military, but state and municipal governments pay a ton of their budget to retirees.

http://www.latimes.com/projects/la-me-pension-crisis-davis-d...

What do you mean by raiding? Do you have a particular state in mind that diverted funds in a controversial way?

(the report places much blame on aggressive assumptions about investment performance)

Several times now various bills and projects have relied on withdrawing funds from social security/pension pools. On the promise that the money will be returned of coarse.

The Social Security Trust Fund owns an awful lot of US treasuries (almost $3 trillion), but I don't think that really meets the bar for "controversial" as treasuries are the only investment it is allowed to buy (by law).

For states, I am interested in specific cases.

There are additional cases I can find, but a quick search turned this up about Kentucky doing this to the state employee health insurance fund for nearly a decade. I believe they have done this to the general pension fund as have other states.

If a state is going to have pensions they need to be independently managed and firewalled from the hands of politicians.

https://kypolicy.org/shifting-health-costs-employees-become-...

>Kentucky has shifted more of the responsibility to pay for health benefits to public sector workers in recent years and then used the savings to help fill holes in the budget. Even after these transfers from the employees’ health plan, its fund balance is continuing to grow, making it a target in the new budget. Governor Bevin’s budget plan includes transferring $500 million out of the plan in 2018 into a new “permanent fund.”

>Over a period of years, balances built up in the state’s plan as more was collected in employer and employee contributions than was paid out in claims. In recent years, the state began to transfer those monies to plug other holes in the budget. Kentucky transferred $50 million in 2009 and $93 million in 2015. For budget year 2016, the state will shift another $63.5 million from the plan to the state’s rainy day fund.

I'm all for this. If we were to cut welfare benefits to fund state pensions, it could be sold as transferring wealth from those who don't work, to those who do which is much easier than hiking tazes

I'm not "insanely wealthy" and I am getting a benefit from the tax cuts, as are most people. Or we can get rid of other obligations like welfare to fund it as well - give money from the non-working (and in some cases arguably useless) to the working.

Someone's got to bear the risk. And, indeed, most private companies have switched from defined benefit (e.g. pension) plans to defined contribution (e.g. 401-K) plans. This isn't a bad thing and generally lines up better with the reality that people mostly aren't with employers for decades. But it means it's now in the hands of the individual to properly fund their retirement given great uncertainty about investment returns.

Defined benefit can work as long as people aren’t being shady. It costs more up front. Pensions are in trouble because they have not made the contributions over the life of the employment. Also, and independent third party management with proper controls.

What I read about whenever these stories hit the news is they assume they can take from the pool either directly or by under contributing thinking they can just pay it later