Solving Public Pension Debt While Helping to End the Recession

Throughout the country, the corpuses of state, county, and municipal public pension funds are being consumed by an ever-growing number of retirees who continue to live longer than earlier actuarial projections had calculated.  Coupled with governments routinely disregarding their annual long-term pension obligations in favor of annual short-term projects, the ever-increasing pool of annuitants is causing most public pensions to become severely underfunded, and some to become nearly insolvent.  More problematically, these ever burgeoning public pension obligations are posing immense stress on local government budgets, causing layoffs, degrading public services and ultimately exacerbating the current economic stagnation.

While it is imperative that new funding sources for public pensions be found, politicians throughout the country are leery of taxing their recession weary constituents to solve the ever-growing pension fund liabilities.  And so the liabilities increase. Daily.

From the employees’ point of view, the underfunded pension problems are the direct result of politicians choosing to divert what should have been regular annual pension payments into other, more immediate expenses. While politicians clamor for pension reform and pension reductions, employees feel demonized for demanding that governments honor their legal and contractual obligations to fund defined retirement benefits. Regardless of perspective or cause, it is clear that if solutions are not implemented soon, employees may lose benefits through governments defaulting on their obligations.

Due to this urgency, everyone must recognize that if something isn’t done soon, the retirement safety net of millions of American workers will be left in tatters.  Just as the banking crisis in 2008 necessitated dramatic federal intervention, it’s time the United States government addressed the issue.  While the federal government’s 2008 TARP (Troubled Asset Relief Program) response “solved” the liquidity issues for the country’s banks, the urgency of the threat to our nation’s economic system resulted in dramatic action that was not coupled with reform.  Because Public Pension Fund liabilities are ballooning and threatening the economic health of states and communities throughout the land, it is imperative that the United States government steps in now, as they did in 2008, with the same sense of urgency, but with a long, rather than short-term vision that includes genuine public pension reform. Federal legislation, akin to the 2008 bank rescue, (National Public Pension Relief Program) would relieve communities of obligations they cannot meet, while at the same time, allowing those same communities to focus on improving the quality of life for its citizens through public infrastructure projects.

Only the Federal Government has the size and resources to solve the problem.  Only the Federal Government has the power to require meaningful pension reform.  The proposed National Public Pension Relief Program would provide immediate liquidity to “solve” the cash requirements of pension funds throughout the country for the next five years.  State, local and municipal governments would be loaned federal money at the current fed discount rate of .75 percent, with the proviso that such a loan would be coupled with genuine pension reform.  Such reform would include dramatic restructuring of all future pension obligations, while satisfying all current pension obligations.

For example, suppose City Pension Fund A required 1 Billion dollars in immediate liquidity.  The Federal Government could provide such liquidity at the current fed discount rate (available to banks) of .75 percent.  City Pension Fund A would receive the 1 Billion dollar loan from the Federal government and the employees would be required to pay the $7.5 million per year to service that debt.  Under such a scenario, City Pension Fund A contributors might be required to provide 1% of their salaries to service that debt.  Meanwhile City Pension Fund A would have 1 billion additional dollars to invest within strict federal guidelines.   Such guidelines should include requirements that the money pension funds borrow be spent on national infrastructure projects.  As a collateral benefit, the money made available by these government loans would benefit private fund managers throughout the country, who would have increased assets available for this public infrastructure investment.

Placing a “1% surcharge” on public workers paychecks would pay for the payment of the .75 percent interest.  In this way, the people who would benefit by the improved solvency of the pension funds would be directly responsible for satisfying the debt service. Most importantly, the general public would not be called upon to make additional sacrifices.

Some might argue that bonds simply increase the debt of the pension funds.  But this is not the case.  The current liabilities of Pension Funds already exist; a low interest bond merely makes the current debt more manageable.

Some might argue that people in one state would not want to “bail out” pension funds in other states.  But because the program is self-financing by those who take out the loan, this plan would protect citizens in one state from spending money to bail out citizens in others. In short, the debt service stays with the local borrower, and not the national community.

Others might argue that public pensions are simply too high and need to be scaled back, due to increased life expectancies and the current worldwide recession. This plan does scale back the pension plans of contributors, by requiring the contributors to fund the borrowing.  Additionally, current workers who have been employed for years with an understanding of a defined benefit for their retirement have contract law on their side.   The solution proposed here would survive legal challenge

The proposed National Public Pension Relief Program is a relatively painless way out of the painful and debilitating circumstance the country and its workers find themselves in.  To review, here are the highlights of the NPPR Program:

  • Low interest Government Bonds pegged at the Fed Discount Rate (same rate given to banks) provided to public pension funds.
  • Public employees required paying service on the debt.
  • Government Bond money flows directly into pension funds without the possibility of being diverted by politicians to other expenses.
  • Government Bond money used for national infrastructure projects, thus ensuring job creation in both private and public sector.
  • No increased tax burden on the public.
  • Increased assets to manage by private fund managers, resulting in additional “boost” to national economy.

No doubt there will be strong resistance to this plan from those who would rather witness the destruction of defined benefits for millions of public employees, than solve the problem in a fair and equitable manner.  Reasonable people, on the other hand, will recognize the United States government is going to have to step in and provide its full faith and credit to the public employees of this country.   Anything less is, as the saying goes, “Greece on steroids.”

Jay Rehak


Chicago Teachers Pension Fund