Obstacles to Pension Reform

Obstacles to Pension Reform
With every well intentioned plan, there are obstacles. In the case of pension reform, the government and municipal unions are very strong - both ideologically and organizationally.

Obstacle one - the legal protection for government employee unions can often be stronger than any other debt. This is due to many states being bound by their constitution to provide a certain level of benefits for the employees in their pension funds. Reform cannot be achieved unless unions and legislators can agree on amending the constitution.

Obstacle two - the still occurring over reliance on discount rates. This ideology is a major reason for the unfunded pension liabilities in the first place. Funding managers who need to rely on the investment returns for pension funding are caught in a vicious cycle by investing in riskier projects in hopes of receiving higher returns.

In my interview with Chuck Reed, he stated his ideology of "Kick the Can". This essentially means that the current administration is "kicking" the debt into the next administration. To do this, states and municipalities are increasing the time frame for amortization to stand now at 20-30 years where a little more than a decade ago, they were at 3-5 years. This increase in time is detrimental to the health of debt liabilities because it increases the principal payment to a point where it will not be sustainable since only the interest is being paid.

As mentioned above, the unions play a large part in the obstacle to pension reform. The excellent benefit packages that are in place for current employees and retirees - as outlined in their defined benefit plans - are something they do not want to give up. The ideology of "we worked hard for so many years and we are entitled to the benefits that we were promised" is ingrained in many state and city workers. Small reforms that are being implemented to new employees such as increasing the age of retirement, less benefits promised at retirement, and contributing to their own pensions are helping but the damage has been done.

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