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Time to face up to pension crisis

The pension liabilities that helped bankrupt Detroit have cast a harsh light on similar problems in Chicago and other large American cities, adding urgency to the question of who should close the shortfall.

This is a challenge that public-sector workers and retirees shouldn’t bear on their own.

States aren’t doing much better. Thirty-four states failed to make their required pension contributions last year, and nine have set aside less than 60 percent of what’s needed.

All told, state and municipal pensions are underfunded by at least $1 trillion, and perhaps much more.

Governments need to stop lying to themselves. Money that’s slated to cover annual pension and health-care fund contributions but is instead siphoned away to cover other costs won’t magically reappear in later budgets.

In the future, states and cities should agree only to benefit packages that are based on reasonable rates of return and annual contributions they can actually make – and then make them.

Many jurisdictions will also have to scale back their past grandiose promises. Given the magnitude of the shortfall, this will have to entail asking public sector employees to accept a new deal, including some combination of working longer, contributing more to their pension and health-care costs, and getting reduced benefits.

It may also, as a last resort, require sacrifices by workers who have already retired.

If governments continue to provide defined-benefit plans, it should be under more stringent conditions, including conservative assumptions about rates of return, larger initial payments and protections against gaming the system.

Or, they can scale back gradually to defined-contribution pensions by first adopting hybrid plans, in which lower benefits are topped off with 401(k)-style accounts.

No matter how gracefully such changes can be accomplished, it won’t be fair to expect workers and retirees to be the only ones to sacrifice.

After all, they are not the people who set the unaffordable policies in the first place.

Some jurisdictions will have to help meet their pension obligations by cutting spending elsewhere, finding new revenue or both.

Those steps won’t be popular, but this is a shortfall too large to close easily or cheaply.