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> OTOH, how to fund pensions properly is a solved problem.

There is another fine way to handle it, which is to use a defined contribution plan rather than a defined benefit plan.

The problem for a lot of states is that it's already too late for any of that. It isn't that we don't know how to do it right, it's that they've been doing it wrong for 50 years and now the account has insufficient funds to cash the checks.

The states essentially borrowed billions of dollars from their pensions without any available future revenue source from which to pay that amount of money back.

So now they have two problems. The first is that if they don't want to be having this problem indefinitely they have to start contributing more than they have to the retirement funds of the current government employees, which means raising taxes or cutting spending (or, similar but different, reducing the number of government employees). And the second is that they have to either pay the shortfall for the existing pensions out of current revenues, which means raising taxes or cutting spending again, or they're filing for bankruptcy.

But nobody ever likes any of those options.

It’s not that simple at all.

Sovereign entities like state governments have the option of simply not paying creditors. Bonds get renegotiated, pensioners get scrip instead of cash.

Ultimately, these impossible obligations that US government subdivisions have will be paid for via inflation. The US has the unique ability to tax wealth globally via the dollar.

Cities go bankrupt, states and territories do not. Pension obligations are generally state obligations.

>The US has the unique ability to tax wealth globally via the dollar

Cool thought, and sounds pretty good as someone who lives in the US. Guess there are certain perks to being the world superpower.

This works fine but you can only do it if there are large foreign reserves of your currency. Now, since foreign reserves of USD are massive, we can print a lot of money (relatively) before it becomes a problem, but it isn't like this exempts you from market effects. The reason foreign reserves of USD are so high in the first place is that we usually do this very little.

The US also has to keep the USD a just-safer investment than other world currencies, held by other governments with their own issues. As long as USD is the safest investment, the US will never default. Don't outswim the shark, just the slowest swimmer and all that.

> Sovereign entities like state governments have the option of simply not paying creditors. Bonds get renegotiated, pensioners get scrip instead of cash.

This is a description of bankruptcy.

> Ultimately, these impossible obligations that US government subdivisions have will be paid for via inflation. The US has the unique ability to tax wealth globally via the dollar.

The states aren't subdivisions of the federal government. The federal government could bail them out, but it's going to be busy with its own debts (see also social security and medicare, to say nothing of the outstanding treasury bonds).

Bankruptcy is a court controlled process and creditors can seize assets in the process. With a sovereign, the conversation is very different.

The feds will ultimately need to bailout the states and the markets know it at some level.

Is 4-6%/yr considered conservative? The personal safe withdrawal rate from the Trinity study was 4% for the rest of someone's life, assuming normal age of retirement, but pension funds have to last longer than 30 years. And there are rumblings from many reputable corners, including Vanguard, that they think 4% may be an optimistic assumption given current valuations.

The Trinity study was about an individual's savings. A group, like a pension fund, has different requirements.

The reason is mortality. Let's say an individual has a 20% chance of reaching age 90. They are not willing to take the risk of being 90 and broke, so they need to save for ages 90-95.

With a large group of people, mortality is much more predictable. The ones that die early collect less, so the lucky few that live a long time can collect more.

To learn more about this, the term to look for is "mortality credit".

Fair, as long as withdrawal rate isn't based on an assumption of 6% annual growth of the underlying investments.

There are many fixes. The employees at a company I used to work for funded their own pension, with company contributions up to some thousands a year per person.

The plan was fully funded, too...meaning that it would never run out of money.

The point is that many cities did not fund their pension funds to the levels required.

Further, as cities employees (often unions) negotiated better payments and a lower retirement age - because, it's all later! - the gap got bigger and bigger.

The US government did that as well back in the 80s when it converted from CSRS to FERS. The unfunded obligation of the old system is something like $800 billion and won't be settled until 2090. The new system is a mix of SS, defined benefit, and defined contribution and is expected to stay solvent indefinitely. New federal employees hired after 2013 got screwed, however, as they upped their contribution rate to cover the massive problem CSRS caused.

People still scream bloody murder about the Post Office being required to fund its pensions and avoid these catastrophes.

No the screaming was about politicians who required the Post Office to fund it's pensions, then went and used that fact to claim the Post Office is mismanaged and we should outsource that basic function.

I think one side of the aisle is definitely more to blame than the other for this manufactured controversy, but to be fair the Democrats also intentionally conflate the pension and healthcare liabilities, for somewhat similar reasons as the Republicans. Democrats have put themselves in the position of implicitly defending pay-go funding for pensions because they don't want to spook public sector unions at the state level where pay-go is the norm. (At the federal level the USPS was the outlier for using pay-go, rather than fully funding liabilities.)

It's indefensible policy wise. The USPS is capable of fully funding the pension liabilities and are making solid progress. It's the healthcare liabilities which are bankrupting them, but Congress has prohibited them from cutting retiree healthcare benefits even though the USPS deliberately (and smartly) negotiated for that flexibility in the union contracts.

But the fact that these liabilities weren't already funded is proof that it was mismanaged.

The funding part is fixed now but the fact that it wasn't funded already is a problem.

Before the USPS was treated as the civil service, with unfounded liabilities being paid out of current taxation, like social security. Now they want the USPS to act like a private company and fund its own liabilities. If you change the rules you should not expect an organisation that was fine under the old rules to be fine under the new ones, especially immediately.

Alternatively, one could argue that these other unfounded liabilities, such as social security, are also poorly run because of them being unfunded.

I'm really struggling to see the need for a government postal service any longer. Compared to 20 years ago, 95% of what I would get in the mail is now delivered electronically. All my bills are paid electronically. I haven't sent a letter via post in recent memory. What I do get delivered by the postal service is frequently mis-delivered. I get first-class mail addresed to my neighbors at least a couple of times a month. Who knows how much of my mail simply disappears? The rest of my mail is junk: adverts and flyers that go straight into the trash, unread.

Package delivery by USPS is cheap and reliable, e.g. for 3rd-party online sellers.

Cheap yes, reliable no. Last time I ordered from Amazon I had to go looking for it in my neighbor's mailboxes (technically illegal for me to do that, but Amazon told me it had been delivered and yet it was not in my mailbox).

Found it two houses down from mine.

Has been reliable in large city, for hundreds of package deliveries, usually faster than UPS.

I've had horror stories no matter WHAT delivery service makes an attempt. Even those automated lockers are seriously annoying (mostly because there aren't enough of them).

I'm actually slightly amazed that the local mall doesn't talk to the various delivery companies and just "give" them an unused store front to setup an automated box for every company inside of it. I imagine the increase in traffic TO the mall would more than make up for the loss of otherwise unused dead space.

Interesting idea, but I don't think it would need to be an entire storefront. I've been to plenty of malls with entranceways that are lined with long, blank, feature-free walls. Lots of lockers could be in those places.

FedEx did the same thing with $5,000 of Apple gear for me.

In my area, USPS is by far the best carrier for parcels, especially for residential delivery.

Having a reasonably well run, national organization with an obligation to serve every home and business is a wonderful thing.

FedEx did it with 15,000$ worth of apple gear for me.

Seriously, what driver would think it's appropriate to leave a bunch of imac pro boxes with a (thankfully in my case good natured) neighbour?

It's a thin justification, but the IRS still sends a lot of correspondence via USPS that they're not allowed to send in other ways. And taxes can still be received at the post office up until the filing deadline. The IRS has come a long ways with eFile, but it's still not universal. So the USPS needs to exist, if only to support the government's current revenue collection mechanisms.

Only until the Legislature or Executive chooses to change those arbitrary rules. They could choose a new delivery partner (or multiple, subject to open access criteria they designate)

Yep!

Though, to be fair it's complicated. Requiring them to fully fund their pension obligations rather than use pay-go accounting is absolutely fair. Not only fair, it should be entirely uncontroversial. And I think it would be relatively uncontroversial, partly because the USPS is slowly making ground. IIRC they're past 70% funding and it's steadily improving.

Setting aside the partisan politicking that has hijacked the debate, IIRC the real bone of contention are the healthcare liabilities. Congress won't allow the USPS to cut retiree healthcare benefits even though the union contracts permit this. Healthcare inflation grew substantially larger than expected. Though this wasn't entirely unforeseen--it's why the contract permits cutting benefits. This is what's actually bankrupting the USPS. Healthcare benefits are only funded to something like 30%, and the USPS simply can't gain any ground because of healthcare inflation.

The best fix for this is Single Payer - healthcare is a COST, only disasters and horrid genetic "luck" are things that can be bet against across populations.

The single payer arguement will win out. It’ll take the end of the era where geezer baby boomers were controlling government to get it done.

Except for when the pension and budget planners plan around 10% returns that don't happen, or the planners make really bad bets for a whole lot of people that will never meet expectations but the money is owed and has to come from somewhere (ultimately the taxpayers)

"It's just a matter of relying on a conservative rate of return with a proven track record."

Responsible states have managed to figure out this problem.

I think you are over-estimating how many responsible states there are: https://www.pewtrusts.org/en/research-and-analysis/issue-bri...

> The funding gap for the state pension plans studied reached $1.4 trillion in 2016—an increase of $295 billion from 2015. State contribution policies proved insufficient to deal with the unfunded liabilities already on the books. Even if all assumptions had been met, the funding gap would have grown by $13 billion. Instead, investments fell short of assumptions for the second year in a row, leaving state pension debt at historic highs.

> Other measures of fiscal vulnerability also show cause for concern. The gap between returns on safe investments and state pension plan investment assumptions was the highest in decades. Independent analyses suggest that states can assume returns of about 6.5 percent a year for at least the next 10 years; 5 percent or lower returns are a real possibility over the next 20 years.7 While strong investment performance in 2017 would lower reported unfunded liabilities in the short term, measures of plan cash flow show that state pension plans increasingly depend on investment performance to keep assets from declining. All of these measures show that plans are more vulnerable to volatility than in the recent past, which could have an adverse impact on funds in the future.

Meanwhile in California, and probably all the other underwater states soon enough: https://reason.com/blog/2017/10/05/pension-costs-are-forcing...

> California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic. As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety.

There's a deep irony in re-electing Jerry Brown to fix the problem he made in the 70s with his giveaways to the public sector, which will be paid for by the private sector who generally is compensated much much less.

You're over-estimating the liability outside of truly screwed places like Illinois. Many states can and will screw over the employees.

California needs a constitutional change, as pensions is just one of a bunch of issues that will kill the golden goose. Unions are getting killed right now -- the real boogeyman is the braindead propositions that tie the hands of the government.

The Reason article to linked to is a great example of overplaying it: "Using data from Merritt Research Services, Governing Magazine determined that American cities with a population of more than 500,000 spend, on average, about a quarter of their budgets on debt service—including payments to pension system and other so-called "legacy costs" like retired public workers' health care costs."

It's kind of disingenuous to portray debt service budgeting as pension costs and neglect to mention things like... bond payments.

The far bigger problem is health costs, which need to be addressed at the national level. Much of the actual cost growth is in increasing health costs, especially for police/fire people who tend to retire young and may be receiving benefits for a decade or more before Medicare kicks in.