Solution to Pension Promises

Here's a link to a great piece from Barron's over the weekend, which addresses the debt albatross hanging around society's neck.

http://online.barrons.com/article/SB126843815871861303.html?mod=BOL_hpp_popview#articleTabs_panel_article%3D1

What to do? What to do?

Why don't we apply the same solution set that can be found at www.cato.org referencing their many-year-old "6.2% Solution" for Social Security. Namely, we need to create a "bridge" from one generation to the next in order to keep the promises we made from two generations ago. Why? Because that "social contract" is completely unsustainable and is literally creating insolvency issues at a local, State, and Federal level.

What would happen? Freeze all pensions today, ideally "earmarking" the frozen portion to each individual. This means that society will honor its social contract in terms of the net-present-value (NPV) of its pension obligations to you (defined benefit plan), but starting tomorrow, like "everyone else", you need to use a 401k-style approach (defined contribution plan). This solution will take 25 years, but it will work. Make it apply to anyone under 50 automatically. If you are 51-55, you can opt "in" or "out". If you opt in, it means you get the NPV of your currently accrued benefits + whatever your 401k-style plan grows to. Anyone over 55 would automatically stay in the current pension system.

How would the bridge work? First off, it is widely known that public sector jobs now either match or exceed private sector jobs in terms of compensation, benefits, etc. This "bridge", besides keeping past social contract promises, also encourages people to buck-up and become entrepreneurs in the American system while simultaneously discouraging people from "getting taken care of by the state". If the perceived benefits from going "public" decline, the benefits of going "private" increase.

Over 25-30 years, the "old" pension system quite literally gets phased out, along with its tremendous debt burden. This additionally creates an additional huge voting bloc that will want investor-friendly rules and regulations, stable money policies, tax incentives and the like. Thus, US politicians will need to answer to this investor class, which simply reinforces the traditions of the American entrepreneurial system, while also backing the USA away from its debt-induced tipping point (toward a welfare state system). A welfare state is simply unsustainable, and not unstoppable (yet).

This whole idea isn't "perfect", but it's a good starting point for a conversation-- a conversation that is long overdue...