IT MAY PROVE to be the wisest of Mayor Nutter's responses to the city's budget crisis, as well as the most popular.

Two weeks ago, he delivered a letter to Treasury Secretary Hank Paulson asking to borrow a piece of the $700 billion bailout fund to shore up pension programs.

The letter, also signed by the mayors of Phoenix and Baltimore, hoped to make the federal government aware of some of the unique challenges of big cities during this economic crisis.

But the Nutter letter also underscores the larger need for a major overhaul of the U.S. retirement system. (Just in case the frightening repercussions of the current market meltdown didn't already make that point to scores of workers and retirees.)

Local government in Philadelphia faces a shortfall of $108 million in fiscal year '09 and an estimated $1 billion over five years. Costs related to pensions account for nearly 25% of that deficit. And it's likely to grow only larger, since the losses in pension funds due to the tanking stock market means that the city must cough up more money for payments to current retirees.

And that universe of city retirees - which now exceeds the number of workers - is going to keep growing.

But that's just the short-term problem. Philadelphia also chronically has underfunded our pension system by putting in less money than required to meet commitments. Currently, our pension fund only has enough to cover 52 percent of our obligations. According to a report from the Pew Charitable Trusts, we have the worst-funded pension system of any major city; the rising cost of employee benefits could eat up 28 percent of the city budget by 2012.

In February, Nutter proposed a pension-obligation bond to address this. Good idea, bad timing. That option crashed when the markets did.

Philadelphia is not the only city government facing this crunch, nor are pension burdens limited to government. (For more on this problem, see Page 21.) General Motors faces crippling pension costs for nearly 750,000 retirees.

In the past two years, GM has pumped close to $30 billion into pension programs for workers. Most of that cost is for people who have already retired. GM's obligations undermine its ability to compete with companies based in countries with lower labor costs.

In most countries, pensions are administered by the government. This provides stability and also allows workers to transfer their retirement savings from job to job. The United States is unique in that our pension system is employer-based. Funds are privately managed and plans vary widely based on the sponsoring company.

It's time for government to help, with more than loans. For starters, Congress can heed the advice of nearly 300 major companies that say that current regulations simply do not work. Pension systems are required to be fully funded and this is causing businesses to put money into the tanking stock market. Relaxing the rules to allow more flexibility will help both companies and workers save for retirement.

However, the U.S. pension system needs more than tinkering around the edges. Our country is unlikely to adopt a state system, but we can provide more incentives for companies to create pensions for their workers. Government mandates and tax credits might help workers gain some retirement security - especially those with no pensions at all. *