Roger Lowenstein has written a good piece overviewing pension plans of all kinds (private, public, social security, 401(k)) and how quite a few of them are promising beyond their funding.
Part of the issue is that it's tempting to make promises that don't have to be dealt with for decades. A particularly nauseating part of the problem is when it is legislatures making the decisions. I often hear people complaining that congress critters "vote themselves raises", but the general public does it all too often. Lowenstein explains this tendency as follows:
Because public pension benefits are legally inviolable, default is not an option. Sooner or later, taxpayers will be required to put up the money (or governments will be forced to borrow the money and tax a later generation to pay the interest). Thus, unions can bargain for virtually any level of benefits without regard to the state's ability, or its willingness, to fund them. This creates moral hazard indeed. At least in the private sphere, there are rules - ineffectual rules maybe, but rules - that require companies to fund. In the public sector, legislatures wary of raising taxes to pay for the benefits that they legislate can simply pass the buck to the future. This explains how the West Virginia Teachers Retirement System has, embarrassingly, only 22 percent of the assets needed to meet its expected liabilities. It also explains how Illinois, a low-tax state, is underfunded by some $38 billion, or $3,000 per every man, woman and child in the state.
San Diego, meanwhile, is particularly screwed up:
As bad as that sounds, the problem of state and local government pensions is even worse. Public pensions, which are paid by taxpayers and thus enjoy an implicit form of insurance, are underfunded by a total of at least $300 billion and arguably much more. While governments have been winking at these deficits for years, they are now becoming intolerable burdens for taxpayers. In San Diego, pension abuse has effectively bankrupted the city. Thanks to a history of granting sweeter and sweeter pension deals that it has neglected to fund, the city has been forced to allocate $160 million, or 8 percent of the municipal budget, to the San Diego City Employees Retirement System this year, with similar allocations expected for years to come. San Diego has tabled plans for a downtown library, cut back the hours on swimming pools, gutted the parks and recreation budget, canceled needed water and sewer projects and fallen behind on potholes.
This situation is approaching for the U.S. national government as well. There are many ways forward, but at any rate U.S. citizens should surely be demanding that our representatives work to fix this situation. The medicine may be bitter, but it is worse to look the other way and leave a situation where the next generation has a much higher tax burden than us because we promised ourselves so many benefits.
It seems to me that one way to move forward is to disentagle retirement security from retirement savings. Retirement savings plans practically always have some risk of going bad. If nothing else, you never know if you will get injured and have to stop working before you have. Thus, there is certainly a need for some sort of safety net for retirement security. But there is no need to make the safety net look like a savings program, which is how the federal social security program works right now: benefits are proportional to what you "save". That's silly for a safety net. For example, you would never think of paying unemployment benefits that is proportional to what the person made while working; you'd pay them fixed amount sufficient to survive while hunting down the next job.
Oh, and of course, let's disentangle retirement plans from the employers, too. Most people don't work for just one employer throughout their careers, nowadays, and so it is increasingly silly to rely on a system that assumes people do.
Just two ideas. I have my favorite approach to social security, but at any rate we should all demand that our representatives work to put this situation in balance. It is fun to laugh at San Diego right now. Let's try to learn from their experience and not be San Diego.