Are govt. pension funds really guaranteed by law?

Liberty Unbound – Promise Now, Pay Later: Among the states, the question isn’t who’s most likely to succeed. It’s who is most likely to default.:

In the precedent decision Spina v. Consolidated Police & Firemen’s Pension Fund, the New Jersey state supreme court had declined to apply conventional contract rights to a retirement plan because a defined-benefit plan must, by its nature, assume solvency that a contract doesn’t. “We think it more accurate to acknowledge the inadequacy of the contractual concept” as applied to retirement plans, the Spina court concluded. In other words, any contractual “guarantee” in a retirement plan is inherently suspect.

This is a key point: if you make a contract with a bankrupt entity, that contract is suspect. There’s no guarantee of solvency. Claims of pension moneys being “guaranteed by law” are dubious. If the plan is bankrupt, its solvency is obviously not guaranteed. Public officials (and, for that matter, pensioners) who count on these supposed guarantees are being reckless.

He follows that with excellent examples of politicians mismanaging state pension funds for political advantage. I love this summary of the government pension problem:

The best solution is to privatize state pension funds and put them in the control of the beneficiaries. It’s the only reliable way to keep politicians’ hands out of the pension cookie jar and, ultimately, out of the taxpayers’ pockets. It would force local governments to budget for and fund (in real time) new benefits granted or new employees hired. If the pensioner hands all of her money over to Bernie Madoff, that’s her folly. The current crisis is a joint-and-several folly forced on all of us. It would be a little harder for politicians (the Madoffs of the “guaranteed by law” swindle) to lie to and steal from taxpayers if state employees controlled their own pensions.