Roger Lowenstein has written a number of insightful books and articles on Wall Street and finance over the years (I would suggest, for example, that his biography of Warren Buffett is probably the most useful on the market).
Lowenstein wrote a book a couple of years ago entitled While American Aged which described the pension problems that plagued General Motors, New York City, and San Diego. It's an interesting read, as it describes in detail the past pension deals that corporations and politicians made that were never properly financed. Now those obligations are coming due, and there isn't enough money to pay for the benefits.
Pensions - and Social Security - have gradually emerged to become one of the major financial problems facing the public sector. It's not enough to say, "Well, we just have to cut the benefits", because it's not legally possible. On the other hand, when you read stories of teachers and policemen being laid off for lack of funding, it is clear that something has to be done.
One of the big problems, by the way, is the unrealistic investment returns that pension plans have used to calculate their required contributions. For years annual return figures of 8% to 10% were assumed, despite the fact that the funds were not returning anywhere close to those figures. Even today, with bond yields at 3% and the past return of the S&P 500 essentially flat since 1998, pension returns assume that somehow private equity and hedge funds will produce enough magic to bail out the funds.
Here's an excerpt from Lowenstein's piece in the New York Times last week, with the full link below:
....Pension obligations are a form of off-balance-sheet debt. As funds approach exhaustion, states will be forced to borrow to replenish them. Some have already done so. Thus, pension obligations will be converted into explicit liabilities (think of a family’s obligation to pay for grandma’s retirement being added to its mortgage)... if the unfinanced portion of all public pension obligations were converted to debt, total state indebtedness would soar from $1 trillion to $4.3 trillion.
Such an explosion of debt would threaten desperate governments with bankruptcy. Alternately, states could try to defray pension costs from their operating budgets. Illinois, once its funds were depleted, would be forced to devote a third of its budget to retirees; Ohio, fully half. This would impoverish every social (and other) program; it would invert the basic mission of government, which is, after all, to serve constituents’ needs.
The Way We Live Now - The Public Pension Crisis - NYTimes.com
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