The words “hazard” and “moral” are two of the most important words in finance, especially when you put them together. “Moral hazard” is a term rooted in insurance industry risk management and pricing practices, and describes how people may take more risk once they get insurance.
The term applies in spades to public sector as well as private sector arrangements. As citizens and taxpayers, we all participate in government schemes providing explicit and implicit forms of insurance to well-organized special interest groups, including banks. In 2008 and 2009, we got our lunch handed to us as our risky financial system imploded, with subsequent bailouts providing a signal that the public purse is available to failing enterprises.
Yesterday, Wyoming Senator Mike Enzi delivered a Senate floor speech with a clear, simple warning of looming moral hazards facing taxpayers from pension systems. Legislation that has ALREADY PASSED THE U.S. HOUSE OF REPRESENTATIVES titled the “Rehabilitation for Multiemployer Plans Act of 2019” would extend subsidized credit and other forms of assistance to massively underfunded “private” sector pension plans, at public expense.
A cost estimate for the bill from the Congressional Budget Office estimated it could increase deficits by almost $50 billion over the next decade, but another estimate prepared at Enzi’s request asserted that the true cost could run more than $100 billion.
Enzi’s concerns may actually help illustrate how the “true” cost estimate understates the cost to taxpayers. Enzi cited how private sector pension plans generally may relax their funding and take more risk. But he didn’t expressly address the possibility, were the legislation to be enacted, that troubled (and massive) state and local government pension plans would then try to draw from the federal well in the future.
Sadly, private and public sector pension deterioration has another initiator, one illustrating the need to fully account for the cost of bailouts. The massive government assistance handed out in 2008-2009 financial crisis socialized losses in ways fomenting greater moral hazard in our financial system more generally, including pension systems.
In his speech, titled “Pension Bailout Will Leave Taxpayers Holding the Fiscal Bag,” Senator Enzi noted that “You can bet if this bill goes through, those plans will be expecting their bailout, when the time comes, What a precedent! All of this is setting up for additional bailouts in the future, potentially putting taxpayers on the hook for hundreds of billions of dollars.”
Senator Enzi concluded “This bill would put the vast majority of workers, who don’t have their own pension plans, on the hook for bailing out the small percentage who do. That hardly seems fair.”