Good for them, not so good for their successors.

Photographer: Alex Wong/Getty Images

Why Would Anyone Follow Detroit's Pension Plan?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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All the way back in 2013, when I learned of Detroit's insane plan to issue "bonus checks" to retirees every time the pension system's investment returns exceeded the target rate, I was rendered speechless. Anyone with even a modicum of understanding of how investments work understands that the target return is the average return expected over a number of years. Some years will be higher, some years lower, but over time, these should average out. If you hand out the "excess" during the good years but don't dock checks during the years in which your funds underperform, you'll quickly drive your pension into insolvency. What kind of numerically illiterate trustees would allow this madness?

The kind who oversee funds in San Diego, Philadelphia, Illinois and a host of other places, according to Steve Malanga. What I had taken to be some sort of local aberration turns out to be astonishingly widespread. I'm not saying that this is a generalized problem with America's public pensions, but because I'm flabbergasted to find that the number of funds engaging in this unsound practice exceeds zero, multiple examples seems to call for gnashing of teeth and rending of garments.

Obviously, this sort of thing should not continue, and I am at least gratified to find legislatures trying to rein it in. But that still leaves holes in the pension funds -- and deeper questions about how this could possibly have happened in the first place. It's old news that legislators like to hand public employees benefits now and leave some future administration to figure out how to pay for them. But this betrays a terrifying lack of basic mathematical understanding among the folks who permitted this, many of whom were trustees charged with ensuring that all employees -- current and future -- had a sound pension to finance their retirement.

Curtailing the bonus checks will fix the absolute worst of the problem. But in a time when many pension funds have gaping holes, we need to be sure that the people in charge understand the scope of the problem and what may reasonably be done to fix it. Seeing the prevalence of "thirteenth checks" in multiple jurisdictions makes me wonder whether America's public pension systems have the leadership they need to resolve their serious issues.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net