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Do Pension Systems Still Work?

San Diego voters will decide in June if they want to eliminate city pensions for most new hires. Backers of the proposal say pensions don’t work in today’s society. But one pension expert who says that’s not exactly the case.

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— The pension system in San Diego has taken a lot of criticism for its generosity and the huge sums of money it siphons from the city. Critics also say pensions are becoming unsustainable as people live longer after retirement. But Stanford Public Policy Professor Joe Nation said there’s nothing inherently wrong with pensions. Rather, he said the people who manage the funds usually underestimate the required contributions and overestimate the projected returns

"I think what happened is that managers and decision makers at pensions systems around California, and around the country actually, said, you know what, what happened in the late 1990s, the stock market boom, is the new norm. And it’s not the new norm," he said.

San Diego infamously got into trouble when city leaders kept increasing benefits and deliberately underfunded the pension. Nation said many funds around the state were providing generous benefits, which eventually made them unsustainable.

"It’s just impossible to fund any retirement system for an individual or group, anyone, in which you may someone more in retirement than you pay them when they are working for you," he said.

Nation said he believes a hybrid retirement system combining pensions, a 401 (k) and Social Security would be the best option for most governments. He said totally eliminating pensions may dissuade talented people from applying for government jobs.

Those who support eliminating San Diego pensions say switching to a 401(k) program will prevent benefits from getting out of control again. Opponents of the plan say the city has already implemented pension reforms that need to be given time to work. And they point out San Diego is not enrolled in Social Security.

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