Last week Ron Lieber wrote an article for the New York Times outlining the chasm between the retirements of public employees and regular people. Lieber warns of a “class war” because public and union employees generally enjoy defined benefit pensions, while most everyone else is responsible for his own retirement savings through such vehicles as 401(k)s and IRAs. The difference between these worlds is exposed by Speaker Pelosi’s recess House session this week to approve a $25bln bailout of the public employees, while nothing was ever done to ease the pain of the private sector. Pensions have always been invitations to shady manipulation outside the view of the public, and Pelosi’s recess session only proves that defined benefit pensions must be terminated.

A pension, unlike an IRA, is not a pile of money set aside for employee retirement. Rather a pension is a promise to provide for a retiree for his entire life with an inflation adjusted annuity. Pension actuaries must make assumptions about how long the pensioner will live, what inflation might look like for the rest of his assumed life, and how various investment markets will perform as well. Needless to say, such predictions are only estimates. The difference between the assumed future obligation to a pensioner and the present value of the pension fund’s assumed future earnings is the amount by which a pension is underfunded (or occasionally overfunded).

Because interest rates and stock markets fluctuate, pensions’ funding statuses also fluctuate. When times are good, pensions seem well funded. Their sponsors often stop making contributions to them, and public employees demand pension benefit increases to spend the funds surpluses. Since the money for pension benefit increases does not hit a State’s budget until many years later, politicians are happy to pay off campaign donors with lavish retirement benefits. In Pelosi’s California, retirees in their 50′s often receive low six figure annuities for life. Indeed, when times are good, the money previously used to fund pensions can also go to public employee salary increases. Of course when times are bad, pension underfunding crushes a State’s budget.

Enter Pelosi. Her public employee political base is rightly nervous that mostly blue States’ woefully underfunded pensions will jeopardize their lush retirements. With such widespread State budget troubles, layoffs and pension cuts are inevitable. Without an ever growing public employee base that overwhelmingly gives to Democrat campaigns, Pelosi is in serious trouble. Fearful of voting on a bailout just before an already difficult election, Pelosi has cut the House’s summer vacation short to shore up her political base. Since angry town hall meetings are no fun, many left leaning Congressmen probably prefer the DC swamp in summer to livid voters at home.

Thus completes the cycle of wasteful pension planning in boom times and Federal bailouts when things inevitably go bust. The pension cycle of mismanagement is a sneaky version of tax and spend. If politicians cannot control the budget process which is at least somewhat exposed to public scrutiny, they will never control runaway public pensions which are mostly off the balance sheet. Further Lieber reports that Pelosi’s $25bln bailout is only a Band-Aid on a $1 trillion pension shortfall. The only solution is to end Pensions entirely.

Most non-public, non-union employees have been weaned off of pensions already. The latest wave of pension collapses has killed off most remaining private sector pensions. The 401(k), which shifts the responsibility of retirement savings and investment to the individual, is now the dominant retirement tool. As with the private sector, State governments must stop offering old-style pensions to new employees and freeze the level of pension benefits to existing ones. Existing pensioners can continue to draw their monthly checks, but the pensions system would slowly fade away as new employees enter the work force and elderly pensioners pass on. Nobody needs to be denied what was promised, but the unsustainable pension system needs to be eliminated.

Politicians cannot be trusted to prudently manage pensions, which are promises that come due long after the politicians have themselves retired. The very nature of a pension encourages lavish promises that are later left at the feet of taxpayers. Rather than bailout a corrupt and doomed system, Pelosi should use the $25bln to fund the termination of public employee pensions so that States can balance their budgets with a little less political gamesmanship.