Eighty-six percent of state and local workers participate in defined benefit plans, as opposed to private-sector 401(k) type plans. Detroit’s bankruptcy filing and financial challenges faced by other municipalities have cast a spotlight on the challenge with financing public employee pensions.
Tracy Gordon, a fellow in the Economic Studies program, joined Richard Johnson of the Urban Institute on Minnesota Public Radio News, hosted by Kerri Miller. Among her many observations, Gordon observed the dynamic in the fluidity of a dwindling tax base that cities must use to provide services for their residents as well as fund retiree health care obligations.
When it comes down to are you educating kids or taking care of your streets or other basic services, because there are not the same protections in law that say, “no this is a contract with employees,” then there is a question of whether those promises will be honored.
Gordon spoke to the issue of pre-funding public pensions, explaining the distinction between social insurance programs, like Social Security, and pensions, which are a form of compensation:
…it’s crucial to distinguish pensions from something like Social Security … a social insurance program, a pay-as-you-go plan where current workers support current retirees. Pensions at the state and local level are a form of compensation. It certainly is a problem when you have fewer employees paying into the plan. But really the employer should never have counted on those current contributions to pay for current retirees. Those contributions should have been made a long time ago when the services were actually being provided and enjoyed and consumed by taxpayers back then.
Listen to the entire interview from Minnesota Public Radio:
Todd Stern speaks at The Economist’s Climate Risks Summit.