Political risk and pensions

We don't often talk about the political risk borne by public-sector workers in traditional pension systems, but that risk is now very real for cops and firefighters in Detroit. The city has twice as many retirees as workers on the job, and that coupled with a decline in population is making it tough for them to pay modest pensions ($28,501 a year for the average retired police officer). The city is looking for ways to reduce those already meager benefits.

Conventional wisdom and the laws and constitutions of many states have long held that the pensions being earned by current government workers are untouchable. But as the fiscal crisis has lingered, officials in strapped states from California to Illinois have begun to take a second look, to see whether there might be loopholes allowing them to cut the pension benefits of current employees. Now the move in Detroit ? made possible, lawyers said, because Michigan's constitutional protections are weaker ? could spur other places to try to follow suit.

?These things do tend to be herd-oriented,? said Sylvester J. Schieber, an economist and consultant who studies pensions.

Governments are simply very prone to mismanaging pension funds, over-promising in good times and underfunding in bad. Latin America learned this the hard way prior to pension reforms in the 1980s and 90s. We are blessed with much stronger institutions than Chile and Argentina had then, and reform would be good for teachers on balance, especially the young and talented ones who are very likely to quit the profession. It would insulate public-sector retirees from political risk and the demographic shocks that are making things very challenging for Detroit right now.

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