Avoiding Meltdowns of Public Pensions

The public-pension gap—the retiree and health benefits that have been promised to government workers but not funded—is the single gravest economic threat to the U.S. today. That is the position of the Laura and John Arnold Foundation. It’s a strong claim, but there are scary numbers behind it: unfunded state and local promises to civil servants now total a breathtaking $2 trillion.

There are ways out of that deep, deep hole—switching from defined-benefit to defined-contribution pensions (as almost all private companies did decades ago), asking public workers to make co-contributions and co-payments. But these reforms are politically difficult. To make them easier, the Arnold Foundation has offered its services around the country as a kind of pro bono think tank—helping states and cities calculate exactly how much they’ve overpromised, and then advising them on ways to stem their flood of red ink. The foundation offered important technical and communications help that allowed Rhode Island to pass the first major pension reform, heading off a Detroit-like disaster from taking place on the state level. Laura and John Arnold complemented that assistance with personal contributions in support of political leaders and groups fighting for pension reform.

Working with the Pew Center on the States, Arnold then offered research and other help to additional locales with runaway pension costs. Kentucky, San Jose, San Diego, Utah, and other jurisdictions acted. Many others are still scrambling, often with Arnold Foundation aid. In its first three years working on this subject, the foundation spent about $11 million to help formulate more sustainable pension policies, with much additional policy assistance to come. Election contributions to officeholders backing reform (from the Arnolds as individuals) came on top of that funding and protected the project from being undermined by political opposition.