Since the beginning of the Great Recession, policymakers and reporters have spoken of a growing crisis in public pensions. Many state and local governments are struggling to meet their obligations to retirees, and the easiest explanation is that government workers are overpaid and their pensions are unaffordable. But the evidence suggests that the pensions crisis is both less pervasive and more complex than that. Beyond the economic crisis, which put enormous pressure on state and municipal budgets, a range of factors including poor decision-making and the influence of big money interests has led to the underfunding of some state and city public pensions. With a clearer understanding of the problem, we can begin to take steps to solve it and keep our promises to public workers.
Contrary to public perception, pension underfunding is not a widespread issue. There is wide variation in pension performance across states, and underfunding is concentrated in particular states (for example, Illinois and Kentucky) and cities (Chicago and Providence). Where underfunding does occur, it seems to stem largely from the internal problems of those governments, which existed well before the recent economic crisis put additional pressure on their budgets.
There is also little basis for the conclusion that state and local employees are significantly overcompensated. On the contrary, pay is comparable at lower skill levels, and private-sector employees are significantly better paid at higher skill levels. According to Alicia Munnell, Director of the Center for Retirement Research, “Pension and retiree health benefits for state and local workers roughly offset the wage penalty, so that total compensation in the two sectors is roughly comparable.” There are surely examples of extreme individual pension obligations that warrant scrutiny, but they do not appear to contribute significantly to the total level of underfunding reported by analysts.
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