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Missouri’s Ticking Pension Time Bomb

Posted by on September 2, 2009

[This post was originally written for my employer’s blog, Show-Me Daily.]

The front page article in today’s Post-Dispatch is about the underfunding of Missouri’s public employee pension programs. This is a serious issue that deserves more attention, and the Show-Me Institute is happy to oblige. Check out our full policy study on the matter, as well as this op-ed by Joe Haslag, who is quoted in the P-D article.

The main problem with Missouri’s public employee pension plans, as discussed in both the P-D article and our policy study, is that they use an outdated system of defined benefits. This plan is generally less expensive for the employees (who is likely concerned about retirement savings, at least somewhat) and more expensive for the employers (who have to pay the difference when the amount they set aside in anticipation of payouts turns out to be insufficient because of changes in valuation, such as stock market fluctuations).

The economics of this arrangement can be simplified as follows (pardon if this is too abecedarian): Employees accept a certain wage and benefit package when choosing between employers. It is common for employers to compete for employees by offering different combinations of wage and benefit packages. When viewed in context of the prevailing type of plan offered by employers, the Missouri public employee pension plans are more generous to the employee and more expensive for the employer. It may be the case that in order to attract the number and quality of employees that the various state agencies desire, a less attractive benefits package with a less generous pension plan would need to be balanced with increased salaries.

As I see it, this is a very good thing. The costs of retirement benefits are only fully realized in the future, when market fluctuations may cause a plan to become underfunded — a situation that is likely to happen only with defined benefit plans. One reason these plans are popular, however, is because the nature of political incentives means that politicians have a much greater chance of enacting a plan with benefits that can be realized today and costs that are paid for tomorrow. If government agencies in Missouri were forced to compete with private companies based on salary rather than benefits, this would lead to increased immediate costs for public employees, which would also mean higher taxes. I think that Missourians would be more likely to vote for less public spending if the spending had to be paid for here and now, rather than after the lifetime of the employee’s career.

As Richard Dreyfuss points out in his Show-Me Institute policy study, defined contribution plans would not only level the playing field between public and private employers pursuing potential employees, it would put the Missouri pension plans on firm ground, economically — defusing the time bomb of underfunded employee pensions.

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