The Overdue Death of Pensions August 6, 2006Posted by federalist in Economic Policy, Finance, Government Regulation, Government Spending, Pensions, Retirement.
The Wall Street Journal expounds on the latest legislation to overhaul private pensions, noting, “the idea of a single company guaranteeing retirement payments for decades is no longer practical, if it ever was.” Frankly, that is an understatement.
Defined-benefit pensions are annuities. Annuities are an insurance product. Unless you happen to work for an insurer, your employer has never been regulated as an insurer or rated for the health of its reserves. What business does an airline or car manufacturer have writing insurance for its employees? Yet that is what all these private companies were doing with their defined-benefit pensions.
It would have been fine if they had literally been funding a deferred annuity written by a proper insurer. But as we know they neither fully funded their pensions nor did they offer the sort of portability that would come with a true annuity contract.
Fortunately, that scam seems to be coming to an end. But there is still the matter of government defined-benefit pensions: Many federal, state, and local government agencies offer these to their employees. I suppose that since they are being backed by governments they do not suffer the same credit risks associated with private companies. Many agencies also collude to provide some degree of pension portability, so an employee can switch jobs without losing his benefits.
But government pensions still suffer from the underfunding hazard — with the cost and risk being dumped on taxpayers. I suspect pensions will persist in government if for no other reason than that they are a convenient way to hide the cost to taxpayers of benefits provided to one of the classically strong special interests: government employees. For this reason, taxpayers should demand that governments fully price and fund their pensions. Or better yet: abolish them and let people buy their own annuities if they want.