Step one in any recovery program is to admit that the problem exists. And, make no mistake about it, California’s public pensions are addicted to debt. Solving this debt crisis requires political courage to implement fundamental reforms, which is why studies that provide excuses not to act are so troubling. It is also why debunking these claims is so important.
One such study was published by the Haas Institute at Cal-Berkeley in 2017 (https://haasinstitute.berkeley.edu/sites/default/files/funding_public_pensions_-_publish.pdf). While there are many problems with this study, this blog post will focus on just one. Page 10 of the study states the following:
Consider the issue of full funding. A fully-funded pension system can, at least in theory, pay off all its current debts with no further contributions from the sponsoring employer. This is vital in the private sector because at any time, a private corporation can go out of business, be liquidated and disappear. Full funding and custody by a third party is the only way to make sure a pension granted by such a business will be paid. A pension system in the private sector must be fully-funded in order for the promise of the pension to mean anything at all.
By contrast, a government will not disappear in the same way. To claim so is only to agree with, among others, GASB itself. In a 2006 paper called, “Why Governmental Accounting and Financial Reporting Is—And Should Be—Different,” they defend the difference between governmental accounting standards and those appropriate for the private sector. Early on, the authors point out that the lack of a threat of liquidation is among the primary differences (emphasis added)
This sentiment is pure folly. Let’s ignore the numerous municipal bankruptcies and global sovereign defaults that have occurred over the years and focus on what is unseen in the above statement.
According to the author, since California is guaranteed to still exist in 20 years, and since California will still be able to tax its citizens in the future, the state will be able to pay any promised future benefit. But, this is not the point.
The material point is that without an adequately funded pension system, the costs on future Californians will be high. Due to our short-sightedness and profligate spending today, Californians will either have to drastically cut the pensions of retirees (e.g. today’s public-sector workers) when they will have little ability to compensate for these cuts, or future Californians (today’s children) will have to endure lower living standards and fewer economic opportunities.
Since this fundamental fiscal trade-off cannot be avoided, it is just as important that government pension funds are fully funded just like private pension funds.
Dr. Wayne Winegarden is senior fellow in business and economics at the Pacific Research Institute.