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April 8, 2013 at 9:28 AM
Public employee retirement systems remain the problem in search of a fix
Judging by the readership stats lots of people took notice of The Seattle Times Sunday story about medical benefits for retired public employees.
The heart of the matter is laid out in the fourth graph of the story:
“While local governments around the country have dealt with debilitating budget problems in recent years, a Washington state retirement system created decades ago for now-veteran public servants has added particularly daunting burdens for some jurisdictions.”
While this story is specifically about the high cost of medical benefits and the ways local municipalities are struggling to pay the costs, a closely related issue is that the unsustainable overall expense of public pensions. Despite the attention of Congress and state Legislatures these issues are not close to being resolved. In a Seattle Times editorial about pensions, The Times Opinion page has argued for replacing public pensions with defined-contribution plans, noting that defined-benefit retirement plans require heavy bailouts when the economy tanks or too many retirees dip from the same pot. It is happening around the country, including in two large, and seemingly well-off California cities, according to a story by the Associated Press.
Back to the story about retirees and their medical benefits: the challenge is one of aging. The growing costs of long-term care for the elderly is creating economic volatility and liability in these plans. This paragraph is frightening: “State actuarial projections indicate that long-term-care costs for local governments are going to rise 250 percent in the next 20 years to $37 million a year. That will put the total cost of medical care for that group of retirees at more than $120 million per year and contribute to a total long-term unfunded liability of $1.8 billion.”
One way cities and towns are weathering the cost is draconian adjustments to current spending, in many cases spending on employees, for example staffing of local fire and police departments. That solution may add up mathematically but it doesn’t make sense to reduce spending on current firefighters and police officers to pay for the benefits of retired ones. It also comes with its own undesirable consequence, including the growing inability to attract strong job candidates to public jobs.