Wednesday, March 2, 2011

Governments Are Unlimited Liability Guarantors Of Public Pensions

A comment I posted on Marginal Revolution "How bad is the state pension funding mess?" by Tyler Cowen:
Despite historical averages, future returns on pension investments are uncertain. In defined benefit plans for public workers, governments become guarantors to make whole any investment funds shortfall. These guarantees are open ended and have no upper limit cap.

States and municipalities should not become guarantors, especially unlimited guarantors. Since state revenues come from the state's residents from taxes and fees, in effect, the state's residents have become unlimited liability guarantors of public workers' pensions.

Any sensible private insurer or guarantor would have limited its future liability.

Any sensible private risk manager would have hedged the shortfall risk through some sort of insurance product.

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