No Pension Bailouts Without Pension Reforms

North Dakota’s Teachers Fund For Retirement (TFFR) is in trouble, but there’s an interesting political dynamic surrounding it.

Republicans, who have been in charge of managing the investments of the fund for some time now, don’t want to own up to fiscal reality. Democrats, on the other hand, don’t want public concern over the fund to build into support for sweeping changes.

Yet, politics aside, the last report on the fiscal well-being of the TFFR showed the fund to be just 62 percent funded. Meaning it has on hand money covering just 62 percent of the fund’s future obligations.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#000000″ txt_color=”#ffffff”]”Defined-benefit plans represent a moral hazard wherein the state obligates itself to pension payments it may not always be able to make. Yet, it can be politically advantageous for one generation of policymakers to make those promises to be fulfilled by another generation of taxpayers.”[/mks_pullquote]

There’s no way to spin that. It isn’t good.

Not surprisingly, there are calls for a bailout. Helmut Schmidt had a good report on the issue over the weekend, but it all boils down to one thing: More taxpayer dollars put into the pension fund to make it whole.

Pensions are always a sticky situation because they represent promises made by the state to the workers in the pension. These workers plan their careers around the promises represented by the pensions. Even if you could argue that these pensions are often far too generous in the promises they make, the fact remains that our policymakers made those promises. The state must follow through on them as best it can.

As such, lawmakers should seek to make the TFFR and other state pension funds whole (which together represent more than $1 billion in unfunded obligations). But with that should come a hedge against future risks. The state should make as its asking price for pension bailouts fundamental pension reform.

The state’s defined-benefit pension plans, which promises workers a written-in-stone retirement payment that the pension funds must hit no matter the circumstances, should be replaced with defined-contribution plans which provide workers a set contribution to retirement plans they can then manage themselves.

The change wouldn’t come easy. The state’s politically-powerful public worker unions merged recently in part to pool their resources for a fight against this exact sort of reform. But lawmakers should look beyond the immediate politics of the situation to the fiscal stability of the state.

The price of filling the fiscal holes created by ill-advised defined benefit pensions should be a move toward defined contribution plans. These sort of plans – represented in the private sector by IRA’s and 401k’s and the like – are what most North Dakotans use to prepare for retirement. There’s no reason why our generously compensated public workers can’t live with the same.

Defined-benefit plans represent a moral hazard wherein the state obligates itself to pension payments it may not always be able to make. Yet, it can be politically advantageous for one generation of policymakers to make those promises to be fulfilled by another generation of taxpayers.

North Dakota’s current crop of lawmakers should eschew what is politically convenient in favor of long-term stability.