On July 9, 2013, The New York Times reported that U.S. Senator Orrin Hatch (R-UT) announced a new proposal to allow the life insurance industry to manage public pensions.
Senator Hatch's high hopes that insurance companies are better insurers of public pensions than municipalities and states is based on three false beliefs.
- States regulate insurance companies better than their pension funds.
- Insurance companies will insure pension funds cheaper and more efficiently than state and local pension funds.
- Insurance companies are more secure than state and local governments.
Each of these assumptions is wrong.
Governments have promised their employees these benefits, so they can't simply "get the obligation off their books" by privatizing the management of the funds. Further, insurance companies are for-profit institutions – shareholders come first – so they charge more than state and local pension funds. Also, as we have seen, insurance companies can fail, requiring huge government bailouts. Examples abound, with AIG foremost in memory. At the state level, Executive Life took over California's pension funds in the 1970s and then went belly up. Pension beneficiaries lost everything.
Senator Hatch argues he is earnest. He wants to help state and local governments, not insurance companies. His theory is that pensions would come off municipal books and benefit from more reliable contributions.
But state and local governments could pay their pension obligations with a simple administrative and actuarial fix - by looking at their assets and liabilities and figuring how much they have to pay each month. This is called 'easy math,' a concept familiar to anyone with a mortgage.
The problems faced by some state and local governments are not structural. Rather, a minority of governors and mayors took pension holidays. They liked paying nothing, diverting funds from their pension obligations to other budget lines. Rather than creating a new structure for public pensions, Senator Hatch, the ranking Republican on the Senate Finance Committee, could hold hearings highlighting this political failure and calling for these localities to pay what they owe.
Contrary to Senator Hatch's intention, this proposal would expose public pensions to more insecurity, not less - while boosting industry profits.