The Public Pension Problem
“The other weird thing about this post is that you link to an article outlining an absolutely disastrous public sector pension crisis without refuting any of the particulars. So we’re stuck with this massive problem and the solution is to . . . export that model to the private sector?” ~ Will, in my State of the Unions thread.
This question implies that there is actually a problem. A little digging and you discover that while there are some states and cities that truly do face a pension crisis, for the most part it is simply not that big of a deal. Even those states which do face a problem with their under-funded pensions do so because of several factors:
1) Revenue is down thanks to this recession we’re in;
2) the anti-tax crusaders have made it very difficult to raise revenue for all sorts of things including – but certainly not limited to – pension funds;
3) mismanagement of pension funds by fund managers, some of whom were outright duped by Wall St. investors, some of whom might have been doing the duping themselves.
The last reason is that some of these pensions really are too good to be true, but this is comparatively rare. In these cases, reform is certainly called for. Yet the anti-public-sector narrative always runs with this reason alone, using anecdotal evidence of worst-case scenarios to prove a much larger, and very misleading point. This is because they want to fan the flames of the ‘new’ class war between the public and private sectors, pitting the middle class against itself. This ‘pension crisis’ narrative was one that I bought for a while myself, much to my chagrin. It’s the old “government is out of money” fallacy used to cut off funding to any number of vital services, from education to healthcare to pensions. Interestingly enough, those pushing this fallacy never want to consider actually raising revenue to tackle the ‘out of money’ problem. Only cuts will do.
A number of commenters have alluded to large unfunded pension liabilities. Two points: first, the fact that state and local governments haven’t been making large enough contributions to pension funds says nothing, one way or the other, about whether workers are overcompensated. Bear in mind that, as Cohn notes, many government employees don’t get Social Security. Second, a “trillion dollar liability” needs to be placed in context: state and local governments spend $2.8 trillion per year. Compare the pension liability with total spending over, say, the expected remaining lifetimes of those workers, and it’s a real problem but not inconsistent with my point that these compensation issues have been grossly overstated.
Obviously, this is not a terribly huge piece of the pie, even if it is a problem (and I’m highly skeptical it’s a problem to begin with except in some occasions). Yet we are led to believe that public sector wages should be brought in line with those in private sector (regardless of the skewed numbers used to come up with the difference in the first place), rather than demand that the corporate class boost private sector wages instead. No, we must drag everyone down rather than lift anyone but those at the very top up.
This new class war is bound to end in tears. Indeed, in Wisconsin Governor Scott Walker is planning to send in the National Guard if public employees resist his efforts to end their collective bargaining rights. Class warfare, meet actual warfare.
Anyways, we can solve this problem by fully funding public pensions and using tax dollars (though only a small portion of a public pension is funded with tax dollars) to do so, or we can bust up the public unions, put everyone on a 401k and cut taxes for corporations and the top 1% of earners – then wait while that wealth just trickles on down. We can look at this issue as one in which public sector workers are paid too much, or one in which private sector workers are paid too little. We can say “the government is out of money” and then throw our hands in the air as if there’s just nothing left to be done except cut away at public employee benefits, or we can use the various other tools at our disposal to close the budget gap.
Here’s Robert Reich:
Public servants are convenient scapegoats. Republicans would rather deflect attention from corporate executive pay that continues to rise as corporate profits soar, even as corporations refuse to hire more workers. They don’t want stories about Wall Street bonuses, now higher than before taxpayers bailed out the Street. And they’d like to avoid a spotlight on the billions raked in by hedge-fund and private-equity managers whose income is treated as capital gains and subject to only a 15 percent tax, due to a loophole in the tax laws designed specifically for them.
It’s far more convenient to go after people who are doing the public’s work – sanitation workers, police officers, fire fighters, teachers, social workers, federal employees – to call them “faceless bureaucrats” and portray them as hooligans who are making off with your money and crippling federal and state budgets. The story fits better with the Republican’s Big Lie that our problems are due to a government that’s too big.
Some reforms do need to be made. Loopholes that allow public sector workers to “spike” their final salaries in order to get higher annuities must be closed. And no retired public employee should be allowed to “double dip,” collecting more than one public pension.
But these are the exceptions. Most public employees don’t have generous pensions. After a career with annual pay averaging less than $45,000, the typical newly-retired public employee receives a pension of $19,000 a year. Few would call that overly generous.
And most of that $19,000 isn’t even on taxpayers’ shoulders. While they’re working, most public employees contribute a portion of their salaries into their pension plans. Taxpayers are directly responsible for only about 14 percent of public retirement benefits. Remember also that many public workers aren’t covered by Social Security, so the government isn’t contributing 6.25 of their pay into the Social Security fund as private employers would.
Yes, there’s cause for concern about unfunded pension liabilities in future years. They’re way too big. But it’s much the same in the private sector. The main reason for underfunded pensions in both public and private sectors is investment losses that occurred during the Great Recession. Before then, public pension funds had an average of 86 percent of all the assets they needed to pay future benefits — better than many private pension plans.
The solution is no less to slash public pensions than it is to slash private ones. It’s for all employers to fully fund their pension plans.
You should read the whole thing; Reich shoots holes through each one of the anti-public-sector myths being propagated these days. It’s easy to buy these myths, too. Anecdotal evidence and horror stories makes for some strong and convincing rhetoric, even if the facts are out of context or conveniently twisted. Read a few stories about government workers gaming the system – like in Bell, California – and you start to really believe that this is at the heart of state governments’ budget problems. But look at the data a little more carefully, and you start to see that it’s simply not true. It’s a diversion from the real problems facing this country, and an attempt to get middle class workers in the private sector to shift their animus toward their public sector peers rather than question their own state of affairs.
John Cole notes that Governor Walker is probably just putting the National Guard on standby to fill in for striking public safety workers. This makes sense to me. John also calls the prison guard union in California catastrophically strong. This raises another point: there are some public sector unions that have too much power. Any organized group can gain too much power and then choose to use it poorly. But demonizing all public sector workers because of the abuses of one or two overly powerful unions is to miss the point entirely.