The Employee Retirement Income Security Act, known as ERISA, resulted from poor management and unfair vesting rules from private employers. The federal government passed the law in 1974 to impose regulations on vesting rules and funding of company pensions. Companies who could not or would not follow these rules could offer employees a 401(k) instead.
The law excluded public employers. At the time, such oversight may have seemed unnecessary. Authors of a recent Forbes article argue, however, that times have changed. Many public pensions are in dire straits, made only worse by the Covid-19 pandemic.
Growing problems with public pensions
In 1974, public pensions took up a small portion of government budgets. In addition, lawmakers generally assumed that public entities would look out for their employees’ best interests, as they are not motivated by profit. At the time, the federal government was also more hesitant to regulate state and local governments.
Nearly half a century later, the size of state and local government pensions has tripled relative to overall budgets. They must compete for funding with other government obligations, such as education, roads, bridges, public health and safety. To make matters worse, many governments have not always invested pension funds wisely and have made it harder for employees to vest in the plans they are paying into.
The troubling result is that defined benefit plans, such as public pensions, are trillions of dollars in debt. And that was long before Covid-19 hit.
The pandemic has only made things worse
With a dragging economy, an unpredictable stock market and record unemployment, state and local governments across the nation are taking a double hit. Tax revenues have plummeted for funding pensions and the investments they already made are on rocky ground, to say the least. What little tax revenue governments have is being quickly eaten up by public health measures to try and control the pandemic.
Should the federal government step in?
Just like everything else this country faces right now, there seems to be no easy answers to the pension problems. The federal government could do nothing and allow governments to fall into bankruptcy. After all, this problem started long before the pandemic.
The Forbes article suggests another path, however. The federal government could step in to fund these pension plans, saving countless retirement plans and helping states avoid bankruptcy. On the flip side, they would apply ERISA regulations to state and local pension plans. Such a major overhaul to a decades-old system would undoubtedly be controversial. As time goes on, however, options seem to grow more and more limited. Whether federal lawmakers step in or do nothing, change to public pensions seems inevitable.