Welcome to America's Pension Nightmare

Actuaries all fairly anonymous folks most of the time. But they are awfully good with numbers. And many of them, using simple data like population growth, life expectancies and guaranteed payout projections, believe that the nation's pension system is unsustainable. While this may, in a flash of inspiration and/or dumb luck be remedied by someone on Capitol Hill before the prophecy comes to pass, it is far more likely that the pension system of the nation is on an unsustainable path to failure. A great contemporary example of the pain that the nation at-large is destined for is provided by Yonkers, New York, specifically its police department.

Blawgconomics would be the first to acknowledge the difficulties and dangers of the law enforcement profession. The last thing we would ever want to suggest is that some of our greatest public servants, people who put their lives on the line, should not get their fair shake. However, that does not mean that the politicians who have created an unsustainable system which appears to be set up to ensure that it is gamed should be let off the hook. By definition, they are answerable to us all.

In Yonkers, in what is, granted, a fairly egregious example, one 44 year old officer is fully retired and makes over $101,000 per year. For life. He was able to do so by inflating his average earnings with overtime hours as a member of electric company road crews, something that the state courts have held is illegal, but which nonetheless appears to be encouraged by individual municipalities. In all likelihood this officer will receive pension benefits for longer than the 20 years he was on the force. With good health, much longer. And with laws that protect beneficiaries from benefit reductions, and therefore foreclose future corrective remedies, this unsustainable path could well lead to bankrutpcy for Yonkers and other localities in the same position. There are other problems. For example, in Yonkers, the annual payments into pension funds which high payouts have necessitated have reduced budgets for services, including police and fire, which local governments can no longer afford.

The biggest surprise here is not that the officer did anything wrong, however. On the contrary, he fulfilled his end of the bargain that was made with the city twenty years ago. Granted, the police department shares some blame for arguably playing outside the rules as far as the overtime details, but the politicians are much more at fault for both putting the system in place and allowing subsequent developments.

This scenario can easily be extrapolated out to the federal government level. Granted, it is unlikely that anyone in the Department of Transportation, for example, is allowed to work road crews to pad their stats. However, many of the normal pension liabilities that are being created today will need to be paid tomorrow. And, they will need to be paid to a growing retired population by a shrinking workforce. This is true of both the pension liabilities of federal workers themselves and the state pensions which will almost certainly need to be bailed out by the federal government.

Individual states, and more broadly the nation, are currently resting below the guillotine of future pension liabilities. Unfortunately, many of the politicians currently in power will be gone and forgotten before the blade falls. Fortunately, there may still be time to increase funding and stop the cycle of promising unsustainable levels of payouts. If it takes a few more Yonkers for people to see this, it is unfortunate. However the lesson needs to be learned before its too late.