“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Tuesday, January 18, 2011

Dangerous Public Pension Thinking From Roger Ferguson

The Wall Street Journal published an editorial by TIAA-CREF's CEo, former Fed vice-chairman Roger Ferguson. Given Ferguson's pedigree and current position, it's rather unfortunate to see him endorsing more pension schemes containing any sort of guarantees.

In this case, he is pitching an Orange County, California plan that ostensibly offers new municipal workers both defined-benefit and defined-contribution components. Ferguson refers to the Federal Employees Retirement System which also contains both a guaranteed annuity and tax-deferred defined-contribution accounts.

The trouble with these approaches is that they offer any guarantees whatsoever.

Ferguson rather disingenuously writes,

"While there's been much talk of putting new state and local government workers into a 401(k)-type plan, we cannot simply shift the burden of paying for retirement entirely onto the nation's 27 million state and local government workers without preserving a source of guaranteed retirement income."

Really? Why the hell not? Nobody gives private sector non-union or management workers any guarantees. Why should government employees be special? In fact, in light of recent information which found average government unionized workers to have both higher average cash compensations and better pensions and benefits, Ferguson's contention is just plain wrong.

Given that it's publicly-funded government we're discussing, I'd say the best solution is no strings whatsoever over time for pensions. Simply offer government workers a defined-contribution payment from the state or local entity, and make individuals, once more, responsible for managing their own retirements.

Perhaps they'll even learn to save again. Rather than simply assume that, once they retire after 30 years, they can enjoy a lifestyle nearly the same as that which they had when fully compensated as workers.

It's just a mistake to continue to place governments and, thus, taxpayers, in a position to be responsible for the retirement arrangements of millions of government workers.

Making guarantees only creates more opportunity for shortfalls and funding gaps which will cause problems later on. Even once-esteemed insurance companies have, in the past, fallen afoul of their overly-generous annuity promises. And annuities disguise hidden costs while adding little actual value beyond simply saving money and investing in mutual or bond funds.

One of the reasons America began its journey down the road of fiscal disaster is because in the 1930s, politicians stupidly chose to design social safety net programs as defined benefit schemes, implicitly assuming the funding guarantees without fully apprising taxpayers of the costs.

Guarantees always create counterparty risks. What if the instrument funding the scheme comes up short? What if governments, as they now so often do, simply delay or skip their required funding payments?

We have to stop this exercise in self-delusion and return to a world where everyone is responsible for their own retirement funding.

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