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December 05, 2011 at 04:09 AM
“Failing to address the public pension crisis promptly would be economically catastrophic, triggering bankruptcies of cities, school systems and potentially even entire state governments,” Josh McGee, Vice President for Public Accountability Initiatives at the Laura and John Arnold Foundation, wrote in a paper released Thursday.
The Laura and John Arnold Foundation is a Houston-based organization that aims to “maximize opportunities and minimize injustice in our society,” focusing on public accountability, education and criminal justice.
In publishing the paper, “Creating a New Public Pension System,” the Foundation’s goal is to educate policy makers and the public about the pension problem and develop fair reforms, McGee wrote.
The primary problem with the current pension system is the “accumulation of unfunded liabilities,” according to McGee, a result of a confluence of issues including lower-than-expected investment returns, insufficient contributions and underestimating the cost of future benefits.
To create a sustainable and fair reform, policymakers need to address unpredictable costs, incentives for states to underfund the plan and labor market distortions, according to McGee. “All three of these structural flaws stem from the way that retirement benefits are promised in a traditional DB system,” he wrote. “Solving these three problems would eliminate future pension underfunding and would increase the security and utility of benefits for public employees.”
McGee proposes that changing the way pension benefits are calculated can ease the burden on states to fulfill their promises.
“The way to create a sound, sustainable and fair retirement savings program is to stop promising a benefit and instead promise an accrual or savings rate,” McGee writes. “This would mean that instead of committing to a fixed percentage of final average salary after a specified number of years of service, the employer would instead commit to contributing a fixed percentage of salary for every year worked.”
