Orrin Hatch Wants AIG to Provide Pensions for Public Sector Workers

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Tuesday, 09 July 2013 04:50

No, I am not kidding. The NYT reported that Hatch is introducing a bill that would allow states to turn over the management and responsibility for pension plans to insurance companies. The NYT presented this sort of switch as good news for both workers and taxpayers, noting regulatory requirements for insurers:

"Perhaps more important, state insurance regulators provide a kind of oversight unknown in the world of public pensions. They require insurance companies to meet capital requirements, taking into account the riskiness of their investments. Insurers are also required to hold more assets than they estimate they will need, and if they burn through their surpluses, state regulators can close them down.'

It would have been helpful to include the views of someone old enough to remember AIG's collapse. The pattern of regulation of insurance varies hugely across states. In many cases the quality of regulation would not provide taxpayers and workers with much confidence. Furthermore, in the event of a systemic crisis that sank insurers responsible for public pensions, like what we saw in 2008, it is virtually inconceivable that governments would not feel the need to step in and back up their workers' pensions.

It is also worth noting that, contrary to the position implied in this article, the vast majority of state and local pensions are well-funded and will be able to pay full benefits with few changes going forward. The main reason for reported shortfalls was the sharp downturn in the stock market at the start of the crisis. Since most pensions use averaging in assessing their asset positions, the depressed market of the crisis years is still reflected in their current reporting, but that will change in the next couple of years if the market stays near current levels. At that point, their funding situation will be appear considerably stronger.

Note: Orrin Hatch's name has been corrected in the title.