What do General Motors, Greece, and California all have in common? Yes, they’re all broke. More specifically, they all went broke because of unfunded pension obligations. This is a pernicious moral hazard, especially in government. It allows politicians to make big promises that come due years later. Huge promises – about $500 billion, in California.
New Jersey’s $30.7 billion unfunded pension liability makes it the seventh-worst funded system in the country, while the unfunded liability for retiree health benefits is $56.8 billion, according to Moody’s Investors’ Service.
A “defined benefit” pension is nothing more than a promise that the money will be there when you retire. If you recently retired from General Motors, it wasn’t. A prudent company will keep track of its pension obligations, and put money aside. They are required to track how much this money will cover. Pension funding of 80% is considered good. That’s for companies. Governments have lower standards.
If your employer offers a “defined contribution” plan, or puts money into a 401(k), then that money is really there. Otherwise, you should be very concerned about your funding ratio. Instead of honest negotiations over wages, management can promise a fat pension and then never fund it. This moral hazard is even worse in government, because – the workers are also voters! The politicians will be long gone when the bill comes due.
The solution is to fully fund all pension obligations and charge them against current income, just like wages. No big promises, no moral hazard. Now, who do you suppose has the world’s biggest unfunded pension liability?
See also: Privatize Social Security