State and municipal governments across the United States know that they are facing a looming financial crisis because of their pension obligations. Politically popular yet financially reckless decisions have left many of these governments with rapidly escalating pension costs. The situation is clearly unsustainable in the long term, which is why the issue of public-sector pensions is now front-page news from California to New York to Illinois (where legislators’ wages recently were suspended for their perpetual failure to resolve that state’s pension crisis).
These days, everyone knows that public-sector pension reform is essential. But what kind of reform? And how is it to be achieved? There is no shortage of debate (and a number of jurisdictions claim that they have put reforms in place). Much of this discussion, though, is marred by misinformation and half-truths. These misconceptions are confusing the public discussion about pensions and facilitating the enactment of pseudo-reforms that are politically attractive but financially inadequate.
This paper identifies these nuggets of misunderstanding and inaccuracy—the myths of public-sector pensions.
After outlining the requirements for real pension reform—how states and local governments can operate pension plans that do not threaten today’s taxpayers with ever-increasing contribution levels or pass the costs of today’s workers on to future generations—we describe the 20 myths that make such reform more difficult. Some are myths of fact (those commonly believed assertions about pensions and pension reform that are incorrect) and some are myths of analysis (interpretations and prescriptions that are seriously flawed). They range from misinterpretations of commonly used terms (such as “actuarially sound” and “cash-balance plan”) to claims about the relative merits of defined benefit plans (exaggerated) and the risks of defined contribution plans (also exaggerated).
The goal of this paper is to facilitate a fact-based and analytically sound discussion of pension reform—a discussion that cannot succeed until these widespread myths are dispelled.