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The Politics of Public Pension Underfunding

To date, the debate over public pensions has focused largely on accounting methods -- how best to estimate the level of current funding needed to pay pension funds' future obligations. That issue is crucial, but in the context of public policy, it needs to be understood in light of the political incentives that affect pensions. It was good to see that topic discussed today at a panel debate on the underfunding of public pensions. The event, co-sponsored by the Manhattan Institute and the recently founded think tank E21 and held at the National Press Club, centered on the question of whether public pensions are in "crisis." Andrew Biggs of the American Enterprise Institute and Josh Barro of the Manhattan Institute argued for the crisis scenario. Arguing the opposite case were Dean Baker of the Center for Economic and Policy Research and Elizabeth McNichol of the Center for Budget and Policy Priorities. Interestingly, no one on the panel argued that public employee pensions face no problems at all. Baker and McNichol simply argued that the problems have been overstated and are relatively easily manageable. Yet this seemingly modest concession is significant. During a discussion over compensation, everyone on the panel seemed to agree that back-loading of benefits -- making them come due far in the future -- is a problem. That creates a perverse incentive to shift costs onto future taxpayers, as Barro rightly noted.  Future taxpayers simply don't have political clout today. Thus, the same public choice diffuse costs/concentrated benefits dynamic -- which incentivizes politicians to transfer wealth from those who complain the least to those rent-seekers that lobbies the hardest -- appears to create a ratchet effect toward ever increasing present-day benefits and unfunded future liabilities, when applied across time. That seems like an intractable problem, but there is something that can be done: curb the political power of public sector unions by ending or seriously restricting government employee unions' collective bargaining privileges. Government employee unions are the principal lobby for increasingly generous public employee compensation, and their ability to negotiate directly with government officials over the expenditure of government resources is a perk that no private party enjoys. For more on public sector unions, see here.