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Pension Insurance for Public Employees?

By Adam Levitin

The New York Times' story about the insolvent pension plan of Pritchard, Alabama notes that while the Pension Benefit Guaranty Corporation (PBGC) partially insures private employers defined-benefit pension plans, it does not insure public employers' defined-benefit pension plans ("government plans" in ERISA-speak).  

This left me wondering why?

From an employee's perspective, such insurance is seems desirable--an employee with a defined-benefit pension plan has a large, undiversified risk in the plan itself.  I don't see any strong employee-side objections (yes, cost/benefit of premiums, but that's a factual question that can't be answered generically). 

Maybe there are insurance issues that explain the exclusion of public employer plans, but they don't leap out at me.  There are moral hazard concerns with any sort of insurance program, but are they substantially different with public employers? There could also be adverse selection problems if public pension insurance were optional.

Alternatively, maybe non-coverage of public plans was just a matter of historical circumstances.  In 1974, when ERISA was enacted, no one really thought that public pension plans needed insurance either because they were all doing well or because of the ability to replenish them via taxation.  

Or maybe there's a political story:  public employers didn't want to be regulated or pay insurance premiums and wanted the flexibility to underfund their plans if they found that convenient.  

I'm curious if anyone has any insight into either (1) the history of ERISA and the PBGC and the exclusion of public plans or (2) general policy arguments against insuring public defined-benefit plans.  Comments are open.  

Full post as published by Credit Slips on December 23, 2010 (boomark / email).