Given how deeply some of the state and local governments are in the hole in this financial crisis, has anyone given any serious thought as to how safe government pensions really are? The two possible scenarios that worry me the most about our current situation are commercial real estate problems being as bad as residential and the failure of a large state or municipality (e.g. Michigan or Detroit) to be able to meet its debt and pension obligations, which might set off a chain reaction in the municipal bond market of the magnitude that we saw in the commercial paper market after the failure of Lehman. Is there a backstop similar to PBGC available for public sector plans (couldn't find one with a few minutes of research) or is the Federal government the only possible source of help?
The state and local government pensions I'm familiar with should actually be safer than most pension systems -- in theory, the government agency makes its required contributions to the trust fund at the time the employee is paid. The bigger state and local pension systems are some of the largest institutional investors, so their fates are more tied to the market than their member governments.
As with any other pension system, if a lot of the trust's holdings are in bonds, and those bonds end up in default, that would be a problem.
The government pensions schemes are facing the same problem as Social Security -- people living and collecting benefits longer, health care costs going up (for those that include long term health benefits), and so on.
"The state and local government pensions I'm familiar with should actually be safer than most pension systems"
Considering the fact that many defined benefit programs look about as safe as ticking time bombs, this doesn't particularly reassure me. In addition, there is the problem of actuarial assumptions. I remember a New York state actuary getting in trouble because he was being paid by the state labor unions earlier this year and came across this article while I was trying refresh my memory of the details: http://www.iht.com/articles/2008/05/21/business/pension.php
