Are Public Pensions Ponzi Schemes?

Christopher Carosa of FiduciaryNews raises the controversial question of whether state and local pension plans have devolved into modern day Ponzi schemes, where the last ones out are left holding the bag. Though Ponzi schemes are created with the intent of defrauding, which no one can argue applies to government pension plans, the effect might be worse, Carosa argues, since the victims may be taxpayers who never signed up to begin with but might be called upon to pay the bill.

Because of longevity risk, many government pensions are a ticking time bomb, which is why most private companies transferred the risk to participants in DC plans. Some government entities are trying to cut benefits, led by Detroit and Chicago, while others have paid higher fees to hedge chasing returns to make up the difference. 

Few would argue that governments have done a very good job managing retirement funds, raising the question of whether ERISA-like standards and processes should apply. Though many states and municipalities have moved to DC plans for public workers, there’s still a big unfunded liability, which varies from state to state. Though some may argue that too many DC participants are ill prepared for retirement, especially with the growing longevity risk, at least what you see is what you get. Not so with many government pension plans.