A Public Pensions Bailout: Economics & Law

Abstract

In several states, public pension plans are at risk of insolvency within a decade. These risks are significant, and the solutions currently contemplated are likely to fall short of what is necessary to contain the problem. If public pension plans do become insolvent, it seems likely the federal government will bail them out. This Article proposes that the federal government prepare for the prospect of federal financial support of public pension plans by instituting an optional regulatory regime for public pensions. If a state elects not to participate, its public pension plans would be ineligible for federal financial support. In states that do elect to participate, public plans would be eligible for federal financial support in the event of severe financial distress. All public plans in these states would be subject to a federal regulatory regime similar to ERISA, including minimum funding requirements. Congress could also authorize sponsors of regulated plans to revise existing employees’ retirement benefits with respect to future services, an option that is available to private employers. This flexibility would allow for much more significant pension reforms on the state and local level since in many states pension reforms can only alter the benefits of new hires.

Keywords: public pensions, bailouts, public finance, fiscal federalism, retirement security, ERISA, insurance, state and local governments

JEL Classification: H75, H81