Hannah Arendt Center for Politics and Humanities
20Mar/1210

Pension Ponzis: Questions About the Public Interest

The public pension crisis is eroding the American social contract. While many are up in arms against Governor Scott Walker's heavy-handed attack on public unions, the fact is that Democratic governors in NY and California are also struggling with the inevitable need to reduce public pensions. Governor Jerry Brown in California admitted recently that public pensions were a Ponzi scheme. That is obvious. What is now sinking in as reality is that the Ponzi scheme is out of money and falling apart.

The Pew Center on the States published a study in 2011 called the Trillion Dollar Gap. The first sentence states the point:

$1 trillion. That’s the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.

A mere one year later, the gap had increased 26%!

The gap between the promises states have made for public employees’ retirement benefits and the money set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009-a 26 percent increase in one year-according to a Pew report.

The gap is actually much bigger than the Pew Center numbers suggest, since the report is based on the official numbers that use way too optimistic expectations of returns.

The Pew Center Report continues, stating the reason this matters so much:

Why does it matter? Because every dollar spent to reduce the unfunded retirement liability cannot be used for education, public safety and other needs. Ultimately, taxpayers could face higher
 taxes or cuts in essential public services.

Municipal bankruptcies are mounting. Prichard, Alabama and Central Falls, Rhode Island both filed for bankruptcy, and they have had to vastly reduce the pensions promised to their public employees. The city of Stockton, California is in bankruptcy court now, and it must pay $30 million every year in pension costs, even as it only sets aside .70 cents for every dollar it must pay.

The crisis is spiraling. In essence, cities and states around the country will have to decide whether to honor their legal debts to public employees or pay for services like police, fire, and parks needed by their current residents. The only other option is a bailout from the federal government, but the size of the problem is enormous and such a bailout seems highly unlikely.

In the meantime, states continue to juggle money around to keep the Ponzi scheme going.  Just this month New York State decided to let municipalities and public entities borrow money from the state pension fund to make their payments back into the state pension fund. This is nonsense. Dangerous nonsense.

And while New York State did finally pass a version of pension reform last week, the reform falls far short of what Governor Cuomo wanted and what is needed. The Assembly raised the retirement age for public employees (not for policeman and firemen) to 63 from 62, whereas Cuomo sensibly asked it be raised to 65. As it stands now, the New York State pension plan is expected to consume 35 percent of the New York State's budget by 2015. This is up from a mere 3% in 2001.  More.

For anyone who cares about government and wants government to succeed, the pension problem must be addressed, for it threatens not only economic disaster, but political cynicism beyond even today's wildest dreams. Across the country, teachers, policemen and firemen, not to mention civil service employees and others, will see their promised pensions shrink precipitously. Not only will this devastate retirement nest eggs for millions of people, it will fray the social contract—pitting young against old and taxpayers against public employees.

It is bad enough that we will have to renege on pensions owed to public service employees (as municipalities in Rhode Island, Alabama, and California are already doing), but it is worse that we will do so after bailing out Wall St. bankers and allowing taxpayers to pay their contractually-obligated bloated bonuses. That these seven-figure bonuses were paid and yet we are unable and unwilling to pay contractually obligated pension costs is both a fact and an example of why the bailout of the bankers was so deeply wrong and misguided.

The issues around public pensions are complicated. They involve contractual promises made to workers that simply cannot be honored as well as pitting public servants against everyday taxpayers. There is also the fact that public employees are paid significantly more than similarly educated private employees at all but the highest levels of income and education. A recent Congressional Budget Office study concluded that:

  • Average benefits for federal workers with no more than a high school diploma were 72 percent higher than for their private-sector counterparts.
  • Average benefits for federal workers whose education ended in a bachelor's degree were 46 percent higher than for similar workers in the private sector.
  • Workers with a professional degree or doctorate received roughly the same level of average benefits in both sectors.

The CBO chart below shows clearly the relative overcompensation of public workers against their private-sector counterparts.  While one could turn this around and argue that private-sector workers are underpaid, the fact is that the current level of benefits for public-sector workers is bankrupting our municipalities and states. We can argue all we want about what is fair pay, but the current pay levels are clearly unsustainable. More, they are threatening to devastate public services as we continue to cut services in order to pay outsized benefits to retired public-sector workers.

Do public employees deserve to make more than private employees? Should we say that someone teaching in public schools deserves more than one teaching in private schools?  For some, the answer is yes and there is a sense that it is more noble and thus valuable to serve in the public interest. Some might even turn to Hannah Arendt to justify such a claim, that a public-service career is more public-spirited and thus more socially valuable than a private-service career.

As much as I value public-sector employees, it is a mistake to put them on a pedestal. It is unclear whether most public employees are more public-spirited than their private-sector counterparts. It is also unclear whether public school teachers and professors are better, more important, or more noble than their private school counterparts.

What is clear, however, is that public employees have a private interest in taking more and more of the taxpayer-generated revenue for themselves. In other words, public employees have a private interest in diverting public funds from public services to their wages and pensions. In this sense, the increasing numbers of public employees and their increasing wages and benefits threaten to hollow out public services in our country.

This is not to condemn public employees. Nor is it to deny that at the higher incomes, wealthy Americans should pay more in taxes to support governmental services. But we should be honest and contest the prejudice that public employees have the public interest at heart. And we need to have an adult debate about what to do about underfunded and ballooning public pensions.

-RB

 


Comments (10) Trackbacks (5)
  1. BRAVO …. well Stated !

  2. The Wall Street bail-out and public pension problems make for a poor comparison. The Wall Street bail-out was focused on liquidity and not solvency. That’s why so much of the bailout money came back with a profit after conditions stabilized. AIG is the latest example of “payment in full”. But if money was advanced to a pension bail-out, it would be gone forever in benefit payments. So, needing to renege on public pensions is bad, but it’s not made worse because of what happened with Wall Street. The two have nothing to do with each other.

    • Peter, beg to differ. If we hadn’t bailed out the banks on Wall St. or had bailed them out differently, the people who run those banks would have lost their companies, there jobs, and their bonuses. We could have bailed out the banks and depositors without bailing out the people who drove those banks into bankruptcy. Yes, the government did make its money back on many of them. But it doesn’t change the fact that we made a decision—an indefensible decision I believe—to bail out not just the banks, but the bankers. That was not necessary. Having made that decision and bailed out bankers for no systematic reason whatsoever, it is shocking to see how blithely we contemplate letting the pensioners go. Your argument confuses the bank bailout with the banker bailout. But these are two very different things.

  3. RB: Even characterizing it as a banker bailout is inadequate to make a proper analogy to a potential pension bailout. Banker compensation is paid by equity owners. True, their compensation would’ve been lower had their institutions failed and perhaps that would’ve been a more emotionally satisfying outcome. I guess, in theory, the bailout could’ve been incrementally smaller too had compensation fallen more than it did. But the money was returned. Money paid to employees was earned back and more with the solvency support of the bailout. Now let’s pivot to pensions. If a pensioner bailout took place, what mechanism do you see to pay it back? Please don’t tell me sales tax on the things they buy with the money.

    The banker bailout was liquidity oriented. A pension bailout would be solvency oriented. The difference is that a pension bailout would be gone forever whereas the bankers, as distasteful as they are, paid it back.

  4. RB: It’s similar to households wondering why they didn’t get a bailout for their underwater mortgages (in their minds, just like Wall Street). The reason is simple: Wall Street paid it back, they wouldn’t. That’s a rather profound difference and a pretty damn good reason for why one bailout happened, but the others (including pensioners) didn’t.

    • Peter,
      I apologize for a very late response. I hadn’t seen these when you wrote them.

      The differences you point out are clear. The real question is why do we bail someone/some institution out? You say that the bailout was a loan, meant to be paid back. In the case of Wall St. that is true. We are loaning companies money and asking them to pay it back. But for pensions, we are not making a loan to a corporation. We are honoring a debt incurred by ourselves, the citizens of the country. We—in localities across the land—promised these pensions to fellow citizens.

      So, you are right. They are different. I see government as more involved in honoring its obligations than in making investment loans to corporations. That said, I would have supported the bailout if it had been to the banks, not the bankers. We owed the bankers nothing, not even a loan to be paid back. We do owe the pensioners something. If anything, the obligation to them is MUCH stronger than the obligation to the bankers. Which, again, are different from the banks.

  5. RB:

    Agreed, our obligation to pensioners is much stronger than our commitment to bankers. But that too isn’t so simple. The bargain between taxpayer and pensioner in many cases is tainted by the influence of public employee unions. The employees sit on one side of the negotiating table as employees, but then face a “management” on the other side which they’ve helped install as voters. It’s a special interest group corruption at the heart of the process. After years of these inherently crooked deals, they now turn to a public for more taxes citing the moral obligation that you allude to. It’s not a good case.

    Observe Wisconsin for an excellent recent example of employee matters being settled at the ballot box. After Walker implemented reforms, the unions immediately switched gears into “voter” mode to create a more agreeable set of negotiating partners for the next time they’d sit down as employees. They lost, but the process was made clear.

    In any event, the obligation you talk of has to be paid by someone and our obligation to taxpayers deserves consideration as well. Asking taxpayers whose retirement security has been hammered by the recession to get hammered some more so that public employees can remain untouched has its own moral problems. I know that’s how the employees would like it and they’ll work as voters to unseat public officials that want reform, but that’s not particularly fair.

    • Peter:

      I imagine we agree on more than we disagree. I have not said we must pay the full pensions to all pensioners. As I wrote in the actual essay:

      “It is bad enough that we will have to renege on pensions owed to public service employees (as municipalities in Rhode Island, Alabama, and California are already doing), but it is worse that we will do so after bailing out Wall St. bankers and allowing taxpayers to pay their contractually-obligated bloated bonuses.”

      So my point is not that we should pay. And of course taxpayers have been completely hosed by politicians and unions and they deserve a break too.

      My point above was to raise questions about public employee unions and about the romanticism many have that public employees work for the public. I was arguing against this and suggesting that we should have fewer public employees and pay them less. All of this I imagine you agree with. Our long argument over months which i enjoy is really about whether in spite of all this it is a scandal to now take away what we promised them. I think it is, even though I am well aware we have to do it and should do it. But I think it makes it morally more difficult that we bailed out the bankers (not the banks). That was the point.

  6. RB:

    Point well taken and thanks for the reply. Compromising benefits is in some ways a scandal, but so too was the process that created those benefits in the first place. I have sympathy for rank and file people that counted on those benefits and simply lacked a comprehension of how unreasonable they were from a public solvency perspective. Nonetheless, change and compromise is inevitable. That’s the good thing I guess: things that can’t happen, won’t happen. The benefits will not be fully paid.

  7. Pew’s research is “a sales pitch that is nothing more than a disingenuous cover for efforts to dismantle public pensions”, according to the National Public Pension Coalition. If reports are true that Pew linked with the Arnold Foundation and their methodology is questionable, I conclude that, the well-orchestrated attack is an attempt to destroy unions. What would happen to the two-party system in the U.S., without the transparent funding of union dues? The party of the multinational corporations have consumer dollars to buy ads, lobbyists, professors (FSU), the press, and campaign war chests.
    Defined benefit plans, both private and public, sustain a middle class and the spending from them prop up the economy, particularly in the communities where the recipients live. To my core, I thank the unions for funding democracy. Who else will?


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