
Detroit Bankruptcy: What Congress must do to prevent future disasters - jseliger
http://www.slate.com/blogs/business_insider/2013/07/20/detroit_bankruptcy_what_congress_must_do_to_prevent_future_disasters.html
======
btilly
An ERISA like system would just put major impetus for the movement from
defined benefit to defined contribution for state and local governments. Which
trend has already happened in the private sector.

I'm sure a lot of people are wondering WTF I'm talking about, and why it
matters.

A defined benefit pension says, "You will get this much per year when you
retire." A defined contribution plan says, "We will put this much into your
retirement fund."

The problem with a defined benefit plan is that to do it properly, you need to
set aside money today for that purpose. And then you need to invest it.
However the most effective long-term investments are risky asset classes like
stocks. But the downside of those is that there will be years where your
pension fund loses money..a lot of money. If you are under pressure to
guarantee that your plan is fully funded at all times, in those years you'll
have an insanely huge obligation.

How big a deal is this? Consider well that governments around the country all
have large pension plans that they have decreed should make about 6.5%. Which,
of course, can't be done with safe asset classes. So they are pushed into
risky asset classes, but not just any risky one, risky ones with a track
record of stable returns. Like private equity. When private equity went belly
up in the 1980s it caused the S&L crisis. If it happens again, the numbers now
are 10x as large, and it is largely government pension funds that wind up
underfunded to the tune of something like a trillion dollars.

By contrast a defined contribution plan just requires that you pay a defined
amount into an investment plan, which is then free to be invested in the most
sensible asset classes.

------
rayiner
What Congress needs to do is get out of retirement entirely (including 401k's,
etc) except to maintain and protect Social Security as the last-ditch
retirement system.

~~~
bilbo0s
"...except to maintain and protect Social Security as the last-ditch
retirement system..."

I suspect that's the rub. I don't have ALL of the information on Social
Security, but the system is probably a good deal more difficult to fix than it
seems. From both a fiscal and political perspective.

~~~
rayiner
Social Security's unfunded liability over the infinite future horizon is equal
to 4% of future taxable payroll, or 1.4% of future GDP:
[http://cnsnews.com/news/article/social-security-
faces-96t-un...](http://cnsnews.com/news/article/social-security-
faces-96t-unfunded-liabilities-83894-household). A 4% increase in FICA taxes
would be hard to swallow for many families, but let's face it, it's not going
to make or break anyone and it would permanently fix Social Security.

~~~
btilly
Alternately Social Security is projected to be solvent for decades if the US
federal government simply pays back the treasury bonds which are invested in
Social Security. I know, actually paying bonds that are owed to Social
Security is a radical notion. As would be raising taxes for that purpose.

------
ams6110
_Congress should extend ERISA or a similar set of rules to municipal and state
governments. This would force governments to manage their pension systems in a
safe way_

But then the politicians couldn't use the pension programs as personal slush
funds. Won't happen.

