The Economist reports that Argentina has recently passed “a law to nationalise the country’s private pension system.” Is this a good thing?
With the stock market in the tank, many individuals yearn for the security of a government-funded retirement plans compared to private, individual investments in stocks and bonds. However, public pensions may not be so safe after all.
An NBER working paper by Novy-Marx and Rauh finds that public pension funds run by the states in the U.S. are significantly underfunded.
“We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today, even though governments portray state pensions as almost fully funded.”
As a San Diego resident, I know first hand how the government can mess up public pensions. San Diego was named “Enron by the Sea” because underfunding the public pension system has created an enormous deficit. City attorney Mike Aguirre is considering having San Diego declare bankruptcy because of the huge shortfall.
- Novy-Marx R, Rauh R (2008) “The Intergenerational Transfer of Public Pension Promises” NBER WP #14343.
As a non-San Diegan, but Californian, I have no compassion for San Diego’s voters who never vote for any taxes to cover basic necessities like fire protection services.
While government can mess up anything, the citizens of San Diego are reponsible for voting for inept officials that supported the pensions and never raise a dime in revenue to pay for it or other services.
In my private sector job, I have no vote to fire my inept boss. Citizens of San Diego have a choice.
The first step in planning your health insurance coverage in your retirement is to see if your employer offers insurance coverage after you retire. Look at the plan, the deductible, and the coverage. If your employer does not offer coverage, Medicare will be an important and integral part of your health insurance if you are 65 years of age or older.