The burden of defined benefit pension plans

So many different elements of the modern economy are on the brink of failing that it is worth pondering which one might end up dealing a fatal blow. Mish Shedlock has long maintained that the next major shock will be a quick tumble into insolvency by city, county, and state governments, and that one of the primary causes will be the untenable pension plans that civil servants have managed to obtain for themselves over the past fifty years.

New Jersey Governor Chris Christie has just announced that his state is on the edge of bankruptcy, and that the main culprit is the state’s pension system. He gave two examples that illustrate how much more the government is required to pay out to pensioners than it takes in from them:

One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits — a total of $3.8m on a $120,000 investment. Is that fair?

A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it “fair” for all of us and our children to have to pay for this excess?

Whether or not it is fair, the important point is that it is impossible. For whatever reason, the government made rash promises to its employees that it now finds itself unable to keep. Unfortunately, unless the ones promised the pensions agree to renegotiate, the only way a city, county, or state government can escape their legal obligation to pay them is to declare bankruptcy.

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4 thoughts on “The burden of defined benefit pension plans

  1. Do you believe the same principles apply here as to mortgage defaults….ie it is just a legal contract and that there is no moral problem with states walking away from that obligation…assuming that they follow the letter of the bankruptcy laws?

  2. Jeff,

    I believe that a government is even less capable (if that is possible) than a corporation to enter into a morally binding arrangement, because to do so it has to be able to impose morally binding arrangements on its individual citizens, and I don’t see how it could possibly do that.

    Somewhere recently I read about a fellow who told his young son what a shame it was that society was burdening his generation with so many financial obligations—deficits, Social Security, pensions, Medicare, and the rest. His son’s response was “Why should I have to pay for any of that?”

    Exactly right.

  3. At the root, it seems that we start down an untenable path once we ascribe personhood to either a corporation, or a civil government.

  4. “A retired teacher paid $62,000 towards her pension…What will we pay her? $1.4 million in pension benefits…”

    By noodling around with various online financial calculators, I see that if the teacher had saved $1000 per month for 35 years and managed to earn about 6% interest, she’d have amassed about $1.4million.

    Would anyone be complaining today if the school district had paid the teacher 12 grand more per year and simply set it aside for the teacher to draw on now?

    And for the younger generation to say that they shouldn’t have to pay that teacher the compensation she deferred, when they benefited from the education she imparted, seems a bit selfish.

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