[surfearth]

Pensions in principle are great. The problem in the US is a combination of (i) unrealistic return expectations, (ii) laws that allow pensions to be underfunded, (iii) poor governance that reduces investment returns, and (iv) overly generous benefits.

Other countries (e.g. Canada) address all four of these problems and have pension systems that are widely admired as well funded, well governed, sustainable and savvy investors. The US needs comprehensive reforms to address all four of these points. Without that, any partial solutions such as increased funding or reduced benefits, only serve to delay fixing the system.

For (i), returns should be conservatively based on a bond index rather than an unrealistic 7-7.5% return.

For (ii), pensions provides should be legally required to maintain a small funding surplus (e.g. 105%).

For (iii), pensions should have independent boards comprised of investment professionals that are free of political meddling and actually pay their staff Wall Street level salaries so they can attract top talent to compete, rather than constantly being fleeced by Wall Street.

For (iv) I don't have any specific recommendations, but it would be interesting to see the distribution of benefits for the Illinois pensioners.

[lotsofpulp]

These could happen, except politicians excluded taxpayer funded pensions from any type of oversight, starting with its exclusion from ERISA. Even now, taxpayer funded pensions don't have to follow rigorous accounting standards such as IFRS, and instead choose to use GASB, which are intentionally lenient so it hides the underfunding.

It's telling that once non-taxpayer funded pensions were brought to fully account for their promises, they started disappearing. It's just too costly and too unpredictable to promise something 30+ years into the future. It's ridiculous as a concept, I've never heard of anyone else saying with confidence that they can predict that far into the future, yet we have billions and trillions of dollars of liabilities based on these projections.

[surfearth]

You're correct that poor governance is a big part of the problem. Nevertheless, it is certainly possible for well governed pensions to remain solvent and even run at a surplus. Insurance and annuities are two other industries with the same basic concept. Pool risks together and guarantee a certain level of future benefits based on conservative assumptions (it is not unreasonable to guarantee an inflation adjusted payout if you assume you will generate a market-based return over the long run). One of the problems today is that assumptions have not been conservative.