Pensions, Social Security, and the Fiscal Cliff

December 14, 2012 at 8:00 AM Leave a comment

Government pensions need to be portable, but who will finance the tail of legacy plans? And what about a safety net for government workers from Social Security opt-out states if they convert to defined-contribution plans? A creative solution addresses both, offers tax relief to high rollers, and increases the life of the Social Security trust fund. Too good to be true?

It seems as though the time to address government pension fund solvency may have arrived…a little late, but better than never. At the risk of sounding like a broken record…

  • Convert government pensions from defined-benefit to defined-contribution plans, either for all new employees or all non-vested employees.
  • Enroll employees affected by the conversion in Social Security.
  • Create a tax-free bond that government entities can issue to pay for the tail on legacy plans.

Closed pension systems are inequitable. Portable pensions allow for mobility, which is part of the new reality among employees. In addition, flawed accounting rules have allowed government pensions to be managed under conditions of insolvency. It is urgent that we fix these problems now.

Employees saving for retirement under defined-contribution plans will bear the risk for their pension funds. They will need the Social Security safety net. Opt-out states like Massachusetts and Illinois need to have sunset clauses on their alternative plans. The Feds need to allow for transition into Social Security rather than an all-or-nothing rule.

With only the vested employees paying into the system, legacy plans will run out of money in the not-too-distant future. Government sponsors will need access to low-interest borrowing to pay off the last of the pensioners’ benefits. Wealthy investors desire tax relief and this may be a way to finesse the situation.

On the issue of the fiscal cliff…An interest tax shield would be a palatable give-away to the rich. The tax-free bonds would not have to be issued immediately, so the fiscal impact would be low at present (although now is a great time to lock in low rates). And it would save pensions for millions of American workers.

Enrollment in Social Security would be a fiscal win, too. The new enrollees would have a lower average age, which would mean there would be an immediate increase in contributions to the Social Security trust fund while the payments to new beneficiaries would be decades away.

Just saying….again.

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Entry filed under: The Pension Trap.

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