How to Solve the Pension Challenge

At a recent Penn Institute for Urban Research event, "Urban Fiscal Stability and Public Pensions: Sustainability Going Forward," pension funding experts discussed some of the issues facing cities as more Baby Boomers begin retiring. According to Diana Lind of Next City, "The pension problem extends far beyond Detroit, to the United States’ largest cities: New York, Los Angeles and Philadelphia all have unfunded liabilities, while Chicago’s pensions are just 50 percent funded. Ballooning pension costs are trouble for city governments, retirees and, perhaps most of all, taxpayers, as infrastructure, schools and other needs are simply put off while the city pays for pensions, benefits and interest."

Among the five ideas Lind notes, one is taken from Stanford professor Joshua Rauh. At the event, Rauh suggested that "payouts should be linked to how well a retirement fund delivers. He noted that the S&P 500 went up by 75 percent between 2009 and 2013. Yet after studying 10 cities, he found that even though pensions are heavily invested in stocks, six of the 10 cities saw their unfunded liabilities fall by just an average of 16 percent; meanwhile in four cities, including New York and Philadelphia, these liabilities actually increased. This anecdote demonstrates the magnitude of the pension problem: Liabilities can grow faster than cancer and can’t easily be put into remission."

Other ideas are rooted in electing politicians to address the pension problem, suing actuaries for faulty analysis of a city's liabilities (as Detroit has down), constantly consulting with authoritative experts, and creating a "shared gain" pay-in approach.