Solving the Defined Benefit Dilemma

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State and local governments have gotten themselves into a fix by promising too much to their employees in their retirement plans and then not producing enough through investment returns to sustain the plans. Some estimate that these defined benefit plans have accumulated over $1 trillion in liabilities. Others estimate that the true liability is three or four times as large.

In my most recent article "Hatching New Ideas" in American City & County Magazine, I look at a number of government plans that have sought innovative solutions to this problem, mostly through incorporating defined contribution plan elements into their retirement systems. The bottom line is that the retirement plans share the risk of investment with their employees. Most governments seem happy with the results. Employees are less enthusiastic.

How governments got into this fix is emblematic of the problems that beset much of our public policy. Legislators are happy to trade wage improvements today for far-off retirement paydays. Unions have garnered some unbelievable benefits for their employees, including some who retire on a higher pension than they made while they were working.

Of course, the reckoning is not that far off. And with the economic crunch that soured investment performance, the inevitable is approaching faster than expected. Look for governments being forced to hike the amount of money they contribute to the plans in order to keep them solvent. Guess where that money will come from.

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Study: States must fill $1 trillion pension gap (msnbc.msn.com)