NEW YORK, NY – State-administered defined benefit pensions are underfunded thanks in part to the boards that oversee pension funds but often don’t act in the long-term interest of the pension fund’s fiscal health, Manhattan Institute Senior Fellow Daniel DiSalvo argues.
In his new report, “The Politics of Public Pension Boards,” DiSalvo points to public pension board members as making fiscally irresponsible decisions that have dire consequences down the road for states that are obligated to pay for pensions they haven’t properly funded through the years.
He recommends state governments adopt defined contribution or hybrid plans for new employees and allow their existing defined benefit plans to expire with the current workforce.
- Contrary to the received wisdom, public union representatives are not always guardians of pension fund integrity. Strong union states like New Jersey, Connecticut and Illinois have pension systems that are woefully underfunded.
- That’s partly due to the flawed structure of public pension fund boards whose members all have incentives to neglect the long-term fiscal health of the pension fund to satisfy the here-and-now wishes of those they represent.
- Political appointees are responsive to constituencies -- such as local industry or the governor’s budget -- that steer them away from acting in the interest of long-term pension fund performance. At the same time, public employees and their union representatives are also tempted to trade pension savings tomorrow for higher salaries today.
- Defined contribution plans do not require boards to make the kinds of decisions that imperil the funds of defined benefit pensions and the interests of taxpaying citizens. The problems of political bias and misaligned incentives are eliminated, and these plans, by definition, can’t be underfunded.