Pension Funds: What Not to Do

A word to the states and the people:  ignore what the federal government is doing in terms of how to manage a budget.  Among the dire predictions about the solvency of state and local employee pension funds (see our NCPA study on this topic), Treasury Secretary Timothy Geithner recently announced that unless the debt ceiling was raised, he would tap into the federal employees' pension funds by suspending contributions to them. 

Excuse me for an inconvenient truth here, but while states and localities deal with underfunded pension liabilities of about $3 trillion (some are funded only half of what they should be), it seems a little odd to be take a non-chalant attitude toward the pensions of federal employees.   Certainly government at the federal level has borrowing powers that states don't have, but this  “do as I say, not as I do” action sends the wrong message on many levels:

  • First, the soluton to debt is more borrowing.  Forget about spending cuts. They may apply to the average household but they don't apply to the federal budget.
  • Second, private and public savings don't mean much in the grand

    scheme of things.

In all fairness, this

is not the first administration that has tapped federal employee pension funds.   And once the debt limit it raised, they must be paid back by cutting the deficit elsewhere.  But the second message is particularly troublesome, because money that is reserved for retirement pensions, whether public or private, should stay that way.  We have seen what has happened to the Social Security Trust Fund.  It has whittled down to no more than a drawer full of IOUs.  We have also seen the trouble that private savers can get into when they borrow against their 401(k) plans or cash out their 401(k)s and IRAs.  They can find themselves paying hefty penalties and taxes or having to pay loans back quicker than expected if they lose their jobs.

What is even more disturbing is the path that Ireland has taken, levying a 0.6 percent tax on the accumulated assets of all pension funds in order to fund their budget deficit.  There is nothing like punishing the citizenry for saving and investing.  At least the United States is not alone in its practice of punishing savings and rewarding consumption, but I wonder why any government does this at all. 

So what's left for the United States to do after this? I can't help but to wonder if Congress is eyeing those Roth IRAs that seniors are drawing upon tax-free.  Will they stay that way?

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Comments (1)

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  1. Ian Kodanik says:

    Good point, but even the feds have to raise the money to pay those pensions, and that means I have to open my wallet.