Some mixture of pension plans, 401(k)s and cash benefit plans will constitute the future retirement vehicles for public sector employees. Heretofore almost all public employees have been covered by pension plans.
Of course, while pension plan benefits are guaranteed to employees, they represent open ended and often unknown financial obligations to their employers.
Meanwhile, 401(k) plans represent limited financial obligations to employers, while the actual end benefit is a risk borne by employees.
Cash balance plans are minimum guarantees provided by employers and function as a hybrid of sorts. They sound good initially but generally are inferior to both pension and 401(k) plans.
Many states have humongous unfunded pension obligations, of course, and our nation's problems with our never ending annual deficits and enormous debt levels are similarly huge.
We'll skip over the national deficits and debt dilemma facing America. Instead let's focus on the states' retirement funding issues for now.
That said, with all the current talk about the nation's longstanding severe affordability problems with deficits and debts, and the states' pension underfunding issues, the nation's and states' financial situations are very much alike. The issue now is what we must do to solve them.
As the state with the biggest unfunded public sector problem, we'll briefly look at the example of Illinois. To put it bluntly, Illinois government officials, taxpayers, public sector workers and unions face a genuine crisis. The state owes ~$96 billion in catch-up funding that it doesn't have and its officials never really planned to collect from taxpayers. They made bad bets on plan investments, in other words, and now are looking for where to send the bill, renege or otherwise get off the hook. But they're no longer able to avoid the ugly $96 billion unfunded reality, and they simply don't know what to do about it.
Despite the politicians' deer in the headlights approach thus far, the problem is actually a simple if not an easy one to solve. The choices are obvious: either (1) get the money from the taxpayers, (2) reduce the pay and benefits which have been promised to public sector employees, or (3) formulate some combination of #1 and #2, respectively.
Of course, taxpayers don't have anywhere near the $96 billion to spare and public sector workers won't happily accept less than what they've been promised. Sounds like an issue for Superman or at least the government knows best gang to solve.
Now let's briefly consider some background.
Unlike the public sector, private sector employers and employees have largely transitioned away from guaranteed pension benefits and into 401(k) plans whose final benefits are always at risk -- to the individual retiree.
And although a topic of discussion recently, cash benefit plans are no panacea either. In fact, cash benefit plans are a form of pension plan with a lower benefit guaranteed than a traditional pension plan. Kind of a floor or minimum but with potential upside for retiring employees.
This whole topic of public sector retiree benefits for the future is a whole a lot like the federal government's need to balance taxing and spending.
It sounds good and conceptually is a very simple thing, but it's not easily done. Too much pain involved for all concerned. Similar to the government's need to balance taxes and spending, we all enjoy freebies and not having to pay for them. And if somebody does have to pay, we want the other guy to pay the bill.
In the end, of course, we all have to pay the tab. But until that end game, whenever it occurs, we look the other way, put off the inevitable and keep fighting tax increases and necessary entitlement reforms.
So government budget balancing and public-employee retirement funding issues are the same problem.
Who will pay for them is the only relevant question. And we all will is the only honest answer.
And to the extent that it's the taxpayer, how much will he have to pay? Well, that's the real issue. Nobody knows until the final bill comes due. Because if the benefit is guaranteed, the taxpayer's liability is open ended. He'll get the full bill, if one is due, no matter how much or little it is down the road. And no matter how well or poorly plan funding and its investments perform over time.
But if it's a 401(k) benefit, the one "at risk" is the public-employee retiree, as is already the case with most private sector employees.
But if the taxpayer is to stay on the "guarantee" hook, how much is that "unknown" and largely "unknowable" liability worth? Will taxpayers be required to pay for the individual retiree's pension "guarantee" risk as well as continue to pay the full tab for all the other existing government services such as police and fire protection?
If so, things are going to get a lot more expensive for taxpayers and a lot more difficult for the economy's future growth prospects. Then it will get even tougher as the vicous circle of slow growth to higher taxes to slower growth to higher taxes continues unabated.
In other words, where and when will the taxpayer draw the line? At what point will self serving and inept bureaucrats and public sector union officials stop running the show? At what point will We the People make the inevitable and irrevocable choice to live within our means and pay our own way?
While we still have a choice or only after some crisis forces us to face the ugly reality?
So there are definite similarities between our national deficts and debts fiasco and our state and local public sector retirement funding fiasco. It's a "mindset" thing which needs to be converted into action, led by We the People.
The government knows best bureaucrats, at both the state and national levels, over the years have dug a deep hole and have no clue how to get out of it without telling the ugly truth. And they sure don't want to do that -- tell the truth, that is.
So whether the truth finally comes out because the taxpayers wake up first or the politicians and union leaders decide to speak out and admit the truth, the truth will come out. It always does.
And only then will we begin to solve our eminently solvable financial issues, regardless of whether they're balancing the nation's books or setting aside enough funds to pay the retirement benefits of our public-employees.
Facing reality and telling the truth will precede taking the necessary action for problem resolution. As always.