Yesterday this Blog posted an article about the problems the country has on the issue of pensions supplied by various government agencies for their employees. Specifically, it addressed the huge liabilities that are being placed on taxpayers, yet are not being properly funded setting the stage for another major financial crisis. Reader response has been very gratifying, as the purpose of this Blog is to foster discussion about the problems we as a country face. One response was particularly enlightening and I have posted it below. It’s a must read for all. Thanks Tough Love for a dose of reality!
Tough Love said
March 17, 2010 at 12:50 PM e
State & City Budgets are stressed all over the nation with supposed one-time “fixes”. Let me tell you something … this isn’t going to be a one-shot fix. Most States, cities, & towns have a FUNDAMENTAL structural problem which MUST be addressed.
Long ago, Civil Servant “cash” pay was quite a bit less than Private Sector pay in comparable jobs. This justified a better pension & benefit package.
Per the US Gov’t BLS, cash pay alone is now higher in the Public Sector than in the private sector. This justifies AT MOST comparable (but certainly NOT better) pensions & benefits.
More valuable Public Sector pensions comes from multiple sources: (1) higher formula per year of service, (2) basing pensionable compensation on the final 1 year instead of 3 or 5 years of service, (3) including post retirement COLAs, (4) arbitrary end-of-career promotions or excessive raises to “spike” the pensionable compensation, (5) allowing the soon-to-be retired to load up on overtime includable in pensionable compensation, (6) including payouts of unused vacation, unused sick days, uniform, parking, and other miscellaneous “allowances” in pensionable compensation, etc.
In MOST Corporate Pension Plans NONE of the above are included. Why? Because the cost would have to be paid for by the employer, and none of these being really justified, employers are not foolish enough to waste THEIR money this way.
In the Public Sector ALL, of the above are generally included/allowed. Why? Our Politicians aren’t spending THEIR money, their spending YOUR money (via your taxes) while they curry favor for campaign contributions and election support.
Sometimes, Corporate Sector Pension Plan sponsors realize that the plan is no longer affordable, so they reduce cost via formula reductions, increases in the retirement age, etc., for NEW employees and for FUTURE years of service for CURRENT (yes CURRENT) employees. This is ROUTINE in the Private Sector and is allowed by ERISA (the Federal Law that governs Private Sector Plans).
Just as in the Private Sector, CURRENTLY EMPLOYED workers in the Public Sector have already “accrued” pension benefits for PAST service. To this will be added benefits for FUTURE years of service. However, in the Public Sector (and there are variations from State to State) the ability to reduce the pension formula for FUTURE years of service for CURRENT employees is “questionable”.
Of course, the employees and their Unions say it cannot be reduced for anyone already employed (even for those very recently hired). There are many variations, e.g., NJ’s Office of Legislative Service said that cannot be changed only for current employees who already have 5 years of service. In some States, the rules that govern such potential Plan changes are in the State Constitution. In others, in Laws/Regs., and in others via Court Case law.
One important consideration in examining the DIFFICULTY in reducing pension for (FUTURE years of service ONLY) for CURRENT employees is that the legislators, judges, and staff (such as in the NJ example above) that “opine” that such reductions are not allowed are THEMSELVES participants in these same pension Plans and would be negatively impacted by such formula reductions.
Hence, they are hardly disinterested parties, but come with a built-in conflict of interest. These persons should not be making decisions that favor THEM (as beneficiaries of their own decisions) but add to the taxpayers’ burden.
The financial situation across the country is getting more dire, and the ROOT CAUSE must be addressed. Stated another way, we must once and for all, address the STRUCTURAL imbalance between income and expenses.
Way too much focus has been placed on the government entity’s neglect to “fully fund” the Plans. This is certainly true (to varying degrees across the nation). What is often given short-shrift is the “expense” side of the income statement. No one ever says …gee … funding a VERY generous pension plan is VERY expensive, and then moves to the logical next questions, that being, is it too expensive BECAUSE it is too generous and perhaps we such make it less generous.
But what exactly is “too generous”? Well, given that “cash” pay in the Public Sector now exceeds that of the Private Sector in comparable jobs, maybe a Public Pension Plan that is more than MARGINALLY higher is too expensive.
Above, I enumerated 6 items which make Public Sector Plans more expensive. Few people not educated in pending funding understand just how VERY valuable (and hence EXPENSIVE) these differences are. One thing is certain, the Public employee Unions know. That’s why they fight tooth-and-nail to stop changes.
Here is an accurate comparison of the costs of Public vs Private Sector retirement packages (pension plus retiree healthcare, if any) …. The value (i.e., cost to purchase the pension/benefit package) at the time of retirement of the employer-paid (i.e., Taxpayer) share of the typical (non-safety) worker’s retirement package is 2-4 times that of employer-paid share of the comparable (in pay, years of service, and age at retirement) Private Sector worker, and that multiple increases to 4-6 times for safety workers (policemen, firemen, corrections officers, etc.).
I’ll bet you had no idea that this HUGE disparity exists. Given that it does, and given that Public Sector “cash” pay by itself is higher, is it surprising that States, cities, towns are being so squeezed to fund this? Not at all.
So what is the solution? Of course Civil Servants deserve “fair” pay as well as “fair” pensions & benefits, but “fair” should mean COMPARABLE to what their Private Sector Taxpaying counterparts get. Right now, this is anything but true.
The EXPENSE side of the income statement has been neglected far too long. To reach a “structural balance” we need to reduce current pensions (as well as retiree healthcare subsidies) in the Public Sector to a level comparable to that of the Private Sector. A few more progressive States & Cities (or perhaps, those in the greatest financial pain) know they must look at this and are beginning the baby steps.
But the BIG problem is the conflict-of-interest conundrum that reducing pensions for CURRENT employees will (in many cases) reduce there own pensions. So, they ONLY propose plan reductions for NEW employees. To be fair, this may be happening not because they just “cave” on addressing such reduction, but because they really believe it is not possible.
A disinterested party might look a bit harder. Perhaps we need to get opinions from outside this circle, e.g., from university scholars. Or perhaps challenges should be brought in the Federal Court system where the conflicted parties are no longer the decision-makers.
Not addressing the huge cost of future accruals for current employees is wishing-away current financial reality. The dire financial problem is here NOW. Reducing pensions ONLY for NEW employees will have little impact for 20-30 years until they begin to retire. We will never make it. But also, given that most (objective) observers agree that current pensions & benefits are overly generous (compared to Private Sector plans … while appropriately taking into account compensation levels), why should we CONTINUE to layer on MORE excessive pension accruals?
It’s been said that the first step in getting out of a big hole is to STOP DIGGING. Well, every day we allow the current plan to continue, the hole gets deeper.
Somehow we need to find the way to reduce pensions (not for PAST) but for FUTURE years of service for CURRENT employees. That, along with a significant reduction in the retiree healthcare subsidy just MAY save us.