Pension Prisoners

Capture of government and its power to tax by private interests can only occur with the cooperation (might I say connivance?) of politicians and/or bureaucrats. But we must also be aware that it is sometimes difficult to determine what is the proper use of the government’s power. The public interest is, in reality, an agglomeration of private interests. When the private interests of a large number of people are well served by a particular policy or project, then it can be considered in the public interest. For example, the condemnation of privately held land held by a few private persons in order to develop a commuter rail line that will serve many thousands of commuters can be considered in the public interest.

But helping a minority of private persons at the expense of the majority can also be in the public interest, as could be argued in the case of affirmative action, in order to establish justice or to correct historic wrongs.

Using the power of eminent domain to confiscate the property of private persons is a serious matter and such power must be wielded only with great restraint and the same can be asserted for the use of affirmative action. The point here is that it is not always easy to determine when a policy crosses the line from good policy in the public interest to the abuse of the public interest in favor of private or special interests.

Our government workers deserve compensation and benefits similar to those in the private sector. It is not only a matter of justice and equity but also a matter of having access to the best available talent pool of potential workers. Many states allow public employees to organize and to bargain collectively in order to assure these benefits.

When I was growing up (which many people assert is still a work in progress) public employment was considered more secure but not as well compensated as private sector employment. So the low wages of public employees were offset by civil service law that provided job security and limited the arbitrary firing of such employees (as could be caused by political patronage) and also by relatively generous retirement packages.

But with the advent of public employee unions their salary compensation has increased to equal or exceed that of private sector workers while still retaining job security and pension benefits far beyond what is available in the private sector. Further, a Brookings Institute study revealed that once unionized, the public employees contribution to retirement benefits declined while that of the public employer increased about 3 times. Public employees are also more likely to have costly defined benefit plans than private sector workers who have defined contribution plans such as 4.01(k)s. The final nail in the public employee pension benefits coffin is the fact that public employees can retire after 25 years service and immediately collect benefits even if they get another public sector or private sector job (known as “double dipping”). So much for means testing or waiting until retirement age.

One can make a case that certain classes of public employees (such as first responders) need generous benefits due to the hazardous nature of their work, But there is a difference between generous and ludicrous. It is true that dangerous fire and police functions cannot be performed by some people as they get older. But retiring after 25 years service (in one’s late forties or early fifties) is more than generous. There are light duty jobs in police and fire departments that can be easily performed by older officers.

So, acknowledging that public employees deserve competitive compensation and retirement benefits, how do some of these programs (actually many of them) slip into an unethical and immoral capture of the government? Public worker salaries are funded by taxes collected in the current year. If public worker salary increases caused a substantial tax increase the resulting backlash by tax-paying voters could be dangerous to the political health of elected officials responsible for the increase in taxes. But retirement benefits are paid out in the future so politicians have been buying labor peace with gold-plated pension benefits for many years. And since fully funding these future benefits would cause the same political health impact as high current salaries, these future pension fund payments have been seriously underfunded for decades. Right now the estimate of the underfunding for the pensions of state and local government workers range from $2 to $4 trillion dollars.

In some cities and states the underfunding problem has become acute. Payments to current retirees are rising rapidly and local governments are increasing taxes to meet these payments. Worse yet, these local governments (such as Richmond and several other California cities) are cutting back on the services they deliver to their citizens because they don’t have enough money left after their pension payments. Others have gone bankrupt.

So we have come back to the problem where private interests have captured government against the public interest and we are faced with a moral and ethical problem that must be resolved. Citizens living in these cities and states are paying taxes for services rendered years or even decades ago to citizens who may have died or may have moved to another (lower tax) locale. Worse yet, the services to current Taxpayers are being cut back despite rising taxes. Obligated pension funding can be as much as 40% of some cities' annual budgets. Politicians in collusion with public employee unions have worked against the public interest and the citizens are crying for redress.

Public companies are required to disclose their estimated unfunded pension obligations and their share price may suffer if they have large unfunded positions. But state and local government (as well as the federal government) operate on a cash basis so unfunded future obligations are swept under the rug.

Some people may say a deal is a deal and we have to honor these pension deals (some are even protected by state constitutions). But a fraudulent deal is not a deal but a crime. Of course, the public employees did not knowingly commit these crimes or attempted to defraud current citizens so they need to be protected even if the terms of their pensions need to be modified.

State and local governments are being held captive by public employee unions but it is the tax-paying citizens who are the real prisoners. There are a number of remedies for this frightful situation. The public employee unions will resist any changes to the benefits their members are due to receive, but the ethical case is clear. The private interests of union members must be subordinated to the public interest. For starters, defined benefit plans need to be replaced by defined contribution plans. Pensions should not be paid out until retirement age and double dipping should not be allowed. Retirement plans must be self-sustainable so that citizens are not forced to pay for the errors and omissions of past public officials or suffer a cutback in the services that they are paying for.