Perdue OKs Investing State Pension Money in Junk Bonds

According to the latest issue of the Carolina Journal, NC’s pension fund has a $3.3 billion deficit!  Bev Perdue’s answer is to allow the pension fund money to be invested in so-called junk bonds and “inflation proof” investments, like commodities (!).  Instead of throwing pension fund money down the rat-hole that is junk bonds and commodities trading, it’s the perfect time to start talking about the public pension system itself.

Some years back, the federal government stopping giving the majority of its employees a defined benefit pension in favor of a defined contribution plan, very similar to the 401(k) plan which most other Americans have through their employers.  But many states have yet to make that switch.  Defined benefit plans are very nice for employees, but not so very nice for their employers, who bear all the risk of coming up with the monies promised for the employee’s entire retirement.  (In the case of government pensions, it is the taxpayer who is on the hook for the promised retirement funds.)  Most members of the private sector are now responsible for turning their defined contributions (or their own personal savings) into enough funds to pay for their retirement.  Why should it be any different for government employees?

As The Economist points out, it is surprisingly easy for governments to fudge on their future pension obligations, making them look much smaller than they really are.  And of course governments can always just borrow some more money to pay off those obligations when they come due in future — something that it is virtually impossible for an individual.

Currently, California’s economy is in a very perilous state, partly due to its pension obligations — earlier this year, it had to resort to issuing IOUs to pay its bills.  If North Carolina wants to end up like California, we should kick this issue down the road.  But if we expect fiscal responsbility, then we need to take a very hard look at the pension issue.  We must scrutinize pension funds at the state and at the city/county levels.  Guaranteed defined-benefit pensions are not a benefit that taxpayers can afford to provide to municipal employees.  If the private sector can offer retirement plans where the risk is assumed by the employee, so can our governments.

With the economy in it’s current state, we must make the changes to the city, county, and state compensation policies now so that NC does not end up like CA in the future.


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