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METARites are familiar with the battles that public pensioners are waging in Stockton, San Bernardino and Detroit to name a few cities. It is pretty clear in aggregate that public pensions are about 70% funded, assuming a perpetual 7.5% annul return going forward. If the return is less than 7.5% each year, it means that the municipality needs to kick in more money to bring it towards “full funding.”

Senator Orrin Hatch of Utah has been studying the public pension problem for the last few years. Yesterday he stepped to the floor of the Senate and proposed a RADICAL change to the current system. [1]

Here is his proposal as I interpret it:

1) Public employee Johnny/Susie works for one year and “earns” a defined benefit pension per a union contract.

2) At the end of the year, the municipality buys a fixed annuity for that one year of service from a PRIVATE insurance company. Say it is MetLife or AIG or Prudential.

3) The municipality 100% pays for the one year annuity at the end of the year.

4) The costs to the municipality are perfectly defined and are no longer dependant on investment returns.

5) The investment risk is borne by the insurance companies, at least until they go belly up and have to be bailed out by the taxpayers.

6) The employee gets a 100% transferrable pension that is NOT dependant on municipal finances. If the municipality goes bankrupt like Stockton, the worst that happens is that the employee loses one year of his pension, since the previous years were already paid in full.

Orrin claims this bill was his effort to prevent public employees from being shortchanged. It is also an effort to prevent municipalities from shortchanging their pension funding responsibilities.

Obviously, if this bill becomes law, it might radically alter public pensions. It is NOT clear how we would transition from the current system to the new system. It is not like the municipalities have the estimated $2 to $4 TRILLION underfunding lying in their couch seat cushions. Maybe this is the new system starting 20XX and the old systems are put into run-off. Run-off would literally take 75 years though. . .

I have no idea if this bill will gain any traction, but it would solve some problems while possibly creating a few new ones. I am betting the private insurance companies will be in favor. Last I heard those folks have a profit motive. . . .

You can see all of the details on the links. . .



[1] Orrin Hatch statement on the Senate Floor: Introduction of the SAFE Retirement Act of 2013

[2] Highlights of The Secure Annuities for Employee (SAFE) Retirement Act of 2013
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