Giving Compass' Take:

· As public pensions continue to face increased scrutiny, The Texas Pension Review Board explains what states need to do to mitigate the insecurity of these underfunded pension plans.

· What causes led to these underfunded pension plans? How can states reform pension policy and reduce public scrutiny? 

· Read more about pension funds and politics.


State and local pension plans face huge challenges: costs have skyrocketed, debt is at historic levels, and investments are riskier than ever. While it is convenient to blame unexpected economic events for public pensions’ current problems, the real culprit is shortsighted policy decisions made by plans and their government sponsors. For public pensions to be sustainable, governments must improve decision making around pension funding, benefits, and investments. Unfortunately, the current governance model does not encourage prudent policy decisions.

Political scientist and Manhattan Institute senior fellow Daniel DiSalvo has argued that problematic incentives are inherent in the current public pension model. The problems begin with the fact that traditional definedbenefit pensions are enormously complex. Policymakers and taxpayers rely almost entirely on pension systems for information on the plan’s fiscal health and for key decisions related to actuarial calculations, funding needs, and investment allocation. These pension systems are independent, quasi-governmental agencies that are overseen by boards whose members have few, if any, education or experience requirements. While pension boards almost always include government representation, employee beneficiaries are generally in the majority or hold half the board seats. Pension boards, therefore, tend to have a strong interest in making the plan look inexpensive and keeping benefit levels high—an interest that conflicts with their fiduciary duty.

Governments, for their part, are responsible for setting pension benefit levels and paying the bill each year. Unsurprisingly, policymakers want to keep budgetary costs low and benefit levels high. It is this alignment of interests between pension boards and policymakers, together with the complexity of defined-benefit pensions and the long-term nature of benefit promises, that creates the problematic incentives that DiSalvo identified.

Empirical research by Sarah Anzia and Terry Moe has confirmed that the incentives embedded in the current governance structure often undermine public pensions’ financial integrity. Over the past several decades, pension plans have consistently underestimated benefits costs, and governments have promised public workers increasingly generous benefits without fully paying for them.

Complicating matters further, each state has dozens, hundreds, or, in a few cases, thousands of pension systems, each with its own board and frequently with overlapping jurisdictions. The sheer number of plans and the highly technical nature of defined-benefit pensions reduce accountability for responsible decision making. The predictable result has been that taxpayer interests generally receive short shrift.

Read the full article about pension plans by Josh B. McGee at The Manhattan Institute.