The Big Lie of Government Pensions

Walter Russell Mead on the “big lie” of government pension systems — like the one Michigan runs for school employees, which could be put on a glide path to elimination if state House Republicans find a way to say to say “yes” to a Senate-passed bill closing the system to new hires starting next year:

The rosy scenarios most American public pension funds use for planning are totally out of touch, says New York Mayor (and hugely successful billionaire investor) Michael Bloomberg. Most state and local pension funds in the US “assume” returns of between seven and eight percent on their investments per year.

…politicians and union leaders in this country have been engaged in a systemic lie of epic proportions. How big and ugly is the lie? Very. Private pension funds assume a standard of 4.8 percent return on their pension funds.

…But while lies can win elections, they can’t pay bills, and as the unsustainable commitments to municipal and state pensions come due, services will be cuts, taxes raised and benefits to retirees will be slashed as reality sets in.

…Today we are seeing what happens when Big Lies come unglued: all over Europe people who believed those sweet delicious stories politicians told them about their pensions and their futures are waking up to one horrible shock after another.

Highlighting just how political those pension fund assumptions really are, Michigan uses two assumed rates of return in its school retirement system: 7 percent for pension investments benefiting employees hired starting in 2010, and 8 percent for older employees. The lower rate was inserted as part of a political negotiation surrounding modest reforms proposed by former Gov. Jennifer Granholm.

The political incentives for politicians and government pension officials will always generate the dishonest games that have created a $17.6 billion unfunded liability in the school pension system. Given what’s happening in places like Greece, California and Illinois, investors and potential job providers are looking much more closely at these government employee “legacy costs.”

Sophisticated private-sector decision makers are not particularly impressed by marginal adjustments made to government pensions that could be reversed if the political winds shift. In contrast, they would be deeply impressed if Michigan House Republicans joined their Senate colleagues in making this just the second state to begin exiting the unseemly business altogether.

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