Defined benefit pensions could work just fine for both employers and employees. But government pensions have a major problem: They are ultimately run by politicians who are good at and used to making promises, but also good at and used to passing the bill to somebody else. The consequences of failing to pay the true cost of these promised pensions occur decades into the future, so it’s very easy for politicians to just push the burden onto future taxpayers.
Michigan’s largest government pension system, the one for school employees, is a slow-motion fiscal disaster. Lawmakers have promised current and past employees some $72.3 billion in benefits but only saved enough to pay 60 cents on the dollar of those promises. The pension fund, then, is $29.1 billion short of the amount the state’s own actuaries estimate is needed.