(Bloomberg View) — No one likes making pension fund payments. You have to take money that you could be enjoying right now, and hand it over to some stranger, in the hopes that decades hence, when you're ready to retire, said stranger will hand it back to you and enable to live out your golden years in reasonable comfort. The connection between sacrifice and reward is, let us say, a little too distant for proper enjoyment.
You know who likes pension funds payments the least of all? Taxpayers. Because they're not even sacrificing for their own retirements, but so that someone else can enjoy a comfortable old age.
— (Related on ThinkAdvisor: Public pensions are being overly optimistic)
Naturally, this leads to a lot of wrangling. And the nature of this wrangling is that most of it will be, to the average taxpayer, insanely boring: knock-down drag-out fights over financial arcana such as "discount rates" and "funding ratios." This tends to sound, to your average person of normal interests and intelligence, like the adults talking in a Charlie Brown cartoon.
Unfortunately, no matter how boring and technical this stuff sounds, it matters. Getting these boring, technical details right is how we ensure that pensioners do not, suddenly and for no apparent reason, find themselves without their long-awaited pension check. And that taxpayers do not find that their taxes have, suddenly and for no apparent reason, risen to levels they cannot afford.
Nonetheless, there will always be a constituency arguing for a more optimistic assessment of how to sacrifice less now and still meet future obligations. Sometimes that even includes the folks getting the pensions.
The political left often prefers a looser (and therefore riskier) standard, because the more conservative the method you use to value the liabilities, the more the government has to put into the fund right now. This makes generous pension benefits seem more expensive to current taxpayers, lessening support for them. The stricter standards also limit the government's ability to spend money right now on stuff the left wants to do. Thus, those of us who think that a conservative standard is the correct one, periodically end up contending with a new report that brightly suggests that everything would be much better if we fiddled with the accounting standards to lower the amount we require governments to contribute.
One recent installment in this perennial debate comes out of Berkeley's Haas Institute for a Fair and Inclusive Society. The author, Tom Sgouros, has a background in public finance, and his arguments are careful and mathematically literate. Nonetheless, I find them unconvincing.
I favor a conservative approach, and I mean "conservative" in the accounting, rather than the political sense. To err on the side of caution. And why should we be cautious? So we can make darned sure that workers get what they're owed.
Sgouros agrees, in fact, that such conservative standards are the correct approach for valuing private-sector pension contributions, in case the business goes bust and the pension needs to stand on its own. But he says that governments are different, because they can't go out of business. In other words, government pensions are less risky, so they don't need such strict standards.
This is … sort of true. A government pension plan can, in theory, operate underfunded forever — as long as the tax base and the workforce are growing faster than their current pension liability.
