Conservatives have complained for years about the government exempting itself from some of the rules and regulations that it imposes on the private sector. A great example – but one that I don’t hear cited much – is the treatment of employee pensions.
In the wake of a number of pension bankruptcies that left retirees without benefits, private-sector pensions became subject to strict federal regulations: Businesses must make adequate contributions to their pension funds, accurately measure their liabilities, and pay insurance premiums to the Pension Benefit Guarantee Corporation.
Public pensions do none of those things. States and localities operate by their own set of accounting rules, which, unlike the rules governing private plans, imply that a pension fund that takes more investment risk immediately becomes better funded. In fact, $1 in stocks is literally more valuable than $1 in bonds in the world of government accounting. Not surprisingly, public pensions take on much more risk than private pensions, and their only insurers are the taxpayers who must pay for any shortfalls.
Now a blue-ribbon panel put together by the Society of Actuaries aims to change that. In a report released this week, the panel recommends much greater transparency in the way that assets and liabilities are reported. According to the panel, pension plans should quantify the risk in their portfolios, calculate the cost of newly accrued benefits based on a risk-free rate of return, and disclose the annual contribution that would fully cover the price of the risk.
The report won’t fix the pension system overnight. The standards are voluntary, and the recommendations are similar to what financial economists have been advocating (mostly unsuccessfully) for years. But perhaps this marks a turning point in the push for accounting reform. State and local governments may soon run out of excuses for the status quo.