The Immorality Of Pushing Pension Debt Onto Millennials

A recent study pegged the debt of state and local government pension plans at $4.7 trillion. If politicians and voters fail to adopt reforms, younger people will be stuck paying off a massive and growing debt they did not create or approve.

State and local government workers receive generous defined-benefit pensions that guarantee specific monthly payments to retirees for life. In theory, these pensions are paid for by investing contributions from government agencies and their employees, and using the proceeds to pay the promised benefits after employees retire.

In reality, pension officials and politicians have increased benefit payouts and lowballed contributions. As a result, they now have inadequate funds to pay the promised benefits. This “unfunded pension liability” puts taxpayers on the hook to make up the difference between promises and assets.

New York and Illinois each have unfunded pension debts north of $300 billion. Texas, Ohio and New Jersey exceed $200 billion apiece. But nowhere is the problem worse than in California, underfunded by $550 billion to $750 billion, depending on the discount rate used to calculate liabilities.

Most states and localities are not doing enough to pay off this debt quickly. From 2001 through 2013, 64% of government pension plans failed to contribute enough money to pay off their debts even over a span of 30 years.

The unwillingness to properly manage pension plans pushes the cost onto younger people and future generations, and forces them to pay for promises they did not make and for services they did not approve. Older generations receive public services without paying the full cost. The injustice and immorality of using millennials as piggy banks should be apparent to all but the willfully blind.

Left unchanged, the pension burden will crush younger generations and deplete their future. The responsibility to fix this problem is as great as any moral imperative because it directly impacts the quality of life future generations will enjoy and their chances for upward mobility.

Today’s growing pension debt exceeds $20,000 per person in California, Illinois, New Jersey, Ohio and many other states. The University of California’s Board of Regents recently voted to increase student tuition up to 25% over the next five years to bail out the mismanaged pension system that covers retired UC employees.

Public pension funds should not be balanced on the backs of students or younger Americans. Fortunately, a handful of reforms would solve the pension crisis in a way that preserves pension benefits already earned, provides competitive pensions going forward, and grants needed flexibility so that future generations are not paying for deals they did not make.

The changes would require financial transparency and full annual funding of each pension plan without issuing “pension obligation bonds.” Unfunded liabilities should be paid off quickly in 15 to 20 years, as recommended by the Society of Actuaries, to minimize shifting the burden onto future generations.

State and local governments should also gain the flexibility to switch to 401(k)-type pension plans going forward for all employees. And voters should be required to pre-approve any pension-plan change that increases financial obligations.

In California, former San Jose Mayor Chuck Reed, a Democrat, is now leading an effort to craft a statewide pension-reform ballot measure for 2016. One needed change is to grant state and local governments the option of adjusting pension benefits for all employees on a go-forward basis, including a switch to 401(k)-type plans, which are more affordable, always fully funded, and limit long-term costs.

Traditional defined-benefit pensions made more sense under the old “hire-and-retire” model when workers stayed with the same employer for 30 to 40 years. Today, 401(k) plans make more sense for modern workers, who change jobs more frequently.

These common-sense reforms can save future generations from paying for promises they did not make. It’s time for politicians and voters to step up and fix this immoral national scourge.

Mr. McQuillan is also author of the new book “California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis.”

http://www.forbes.com/sites/realspin/2015/06/03/the-immorality-of-pushing-pension-debt-onto-millennials/