State pensions plans are in trouble—that much has been easy to pin down. What has been more elusive is a solution. Joshua Rauh, associate professor of finance, gave a talk today at a conference in Washington, D.C., outlining his suggestions for dealing with the crisis.
From his blog post at Everything Finance:
The federal government should cut a deal with states.They should allow a state to issue tax-subsidized bonds for the purpose of pension funding for the next 15 years — if and only if the state government agrees to take three specific measures to stop the growth of unfunded liabilities:
- The state must close its defined benefit plans to new employees under a “soft freeze” and agree not to start any new defined benefit plans for at least 30 years.
- The state must annually make exactly its actuarially required contribution (ARC) left over from the existing underfunded plans; only the amount of that ARC will be tax deductible.
- The state must include its new workers Social Security, and provide them with an adequate defined contribution plan, again for at least 30 years. To this end, the federal government should start a Thrift Savings Program for state workers and operate it alongside the existing Thrift Savings Program for federal workers.