The Great Debate
State and local pension plans are underfunded, in many cases dramatically. Enough so that, in the next decade, many states will have to cut benefits or services, raise taxes, or receive some form of a bailout. Matt Taibbi’s latest in Rolling Stone blames the situation on a convenient villain — Wall Street. But it’s far more complicated than that. State and local plans are underfunded because of terrible accounting standards, local governments who underfunded their plans, and plan trustees who gave away sweeteners that robbed plans of their assets. That is the inherent problem with traditional pensions, or any type of compensation that is back-loaded (payments pledged for the future). It’s too easy to over-promise today and not set enough money aside, but either retirees or taxpayers eventually have to pay up. It’s tempting to blame Wall Street, but that does not solve the problem. It enables public employees to lobby against their own long-term interests.
America has moved to a system where nearly everyone is expected to save and invest for their retirement. Yet remarkably little attention has been paid to the big question: what should people do with their money when they actually retire? Neither the government nor the financial industry has any good answers. This leaves individuals ill-equipped to figure it out for themselves. Before the bulk of baby boomers reach retirement they will need a better solution. That will require the government and the financial industry to define their role in how people finance their retirement.
A month has passed since Congress allowed interest rates on federal student loans to double for some borrowers, increasing the cost of their college educations by as much as $4,500. While the debate continues to focus on the interest rate for future borrowers, it is ignoring the larger problem with student debt: the more than $1 trillion that had already been borrowed before the interest rate debate. This existing debt will continue to drag down borrowers’ financial security, which in turn drags down the entire economy. By how much? Demos, the public policy group where I work, has just released a study that estimates the economic impact of the existing student debt burden, and finds that it may cost the country more than $4 trillion in lost economic activity.
Social Security is not the problem – it is the solution.
Washington is filled with talk of a looming “retirement crisis.” The discussion focuses on funding Social Security and usually includes calls to cut benefits – either by changing payout formulas or raising the retirement age.
from Reuters Money:
Retirement investors have struggled with a Jekyll and Hyde economy these past two years, where Dr. Jekyll lives very well on Wall Street while Mr. Hyde runs roughshod over a terrified Main Street.