Walter Russell Mead is getting it right about the utter selfishness of the boomer generation and how it is bankrupting our governments, thus leaving government incapable of public services for the next generation.
This story is about more than just high gas prices or taxes. It’s yet another case of the boomer generation stealing from younger generations. Besides promising themselves fat pensions that they refused to save money or tax themselves to pay for, the boomers let the country’s infrastructure run down. The next generation is already staggering under a rising tax burden, student loan debt, and retirees’ massive health care bills. On top of all this, they now have to pay through the nose just to keep the roads, bridges, and tunnels in good repair after years of neglect and deferred maintenance.
When people talk about the cost of entitlements or pensions, there is often a whiff of condescension, as if government employees don’t deserve their benefits. Often forgotten is the fact that private pensions are underfunded as well, and they are insured by the federal government. And now we are told that the military may have the biggest pension problem of all. Here is what the Financial Times reports:
Of all the politically difficult budget issues that Mr Hagel will face, few are more charged than the question of military entitlements which have risen sharply over the past decade. A report last year by the Center for Strategic and Budgetary Assessments concluded that at current rates, “military personnel costs will consume the entire defence budget by 2039”. Robert Gates, Mr Obama’s first defence secretary, once warned that these expenses were “eating us alive”.
Just as pensions and entitlements will soon crowd out all other government spending, so too will military pensions crowd out all military spending.
No one today can responsibly argue against pensions and health care. And no one can call the soldiers lazy burdens on the public weal. But neither can we fail to recognize that our addiction to entitlements is destroying our politics and our public spirit. We are sacrificing public action—be it the pursuit of scientific knowledge, the erecting of monuments, the education of our young, the building of infrastructure, and even a well-outfitted military—for the private comfort of individuals. It is no wonder that our political system is broken at a time when all incentives in the country lead interest groups to focus on parochial interests above the common good. It is inconceivable that this situation is not in some way related to the emergence of entitlements as the central function of government.
The question is one of principle. We have gone from a common sense that people are responsible for themselves and the government provides a safety net to a common sense that everyone should receive an education, everyone should receive healthcare, and everyone should receive pension benefits for as long as they live. It is possible to embrace the latter common sense, but with it comes a significantly higher tax burden and a much more communal ethic than has typically reigned in America. This is not a problem that hits only public employees. It is endemic throughout society. And our military.
Two articles in the Wall Street Journal and the New York Times this weekend show the grave threats to two great institutions, both of which I care deeply about.
The Times has a story on the threatened cuts looming over the University of California and the State University of California system.
Class sizes have increased, courses have been cut and tuition has been raised - repeatedly. Fewer colleges are offering summer classes. Administrators rely increasingly on higher tuition from out-of-staters. And there are signs it could get worse: If a tax increase proposed by Gov. Jerry Brown is not approved this year, officials say they will be forced to consider draconian cuts like eliminating entire schools or programs.
To get a sense of the problem, just consider this:
While there are more students than ever, the number of academic advisers has dropped to 300, from 500 a few years ago, for more than 18,000 undergraduates. Courses that used to require four writing assignments now demand half that because professors have fewer assistants to help them with grading papers, something other campuses have implemented as well.
Meanwhile, the WSJ reports that policemen and firefighters in San Jose, California are being insulted, flipped off, and outright despised. One officer was recently criticized at a supermarket checkout line for buying steaks. A firefighter reports being given the finger while in his truck. This is sad. These are people who are prepared to risk their lives to protect us. They do so for salaries that allow them to live well, but not well enough to actually afford a home in San Jose, where the median house price is over $400k. Are these officers and heroes really the blood-sucking vampires that they are being made out to be?
Clearly the answer is no, and yet the officers do make very rich pensions. As the WSJ reports:
In the current fiscal year ending June 30, San Jose's retirement obligations soared to $245 million, up from $73 million a decade ago, according to the city. For police officers and firefighters who have retired since 2007, the average pension is $95,336, making them among the most generously compensated in the state.
The threat to the California public universities and the animosity to public-safety officers who make up an important part of the middle class are two sides of the same problem. As pension costs soar, governments are taking away middle-class services like education, park playgrounds, and libraries. As middle-class taxpayers see their services cut, they blame those whose middle-class lives they are supporting. We are in for lots of this over the next decade.
The Arendt Center continues to follow the pension crisis because it is another example of the way that facts staring us in the face can simply be denied and ignored by those who don't want to see them. We also are following the pension mess because we care about politics and government. The attack on government today too often takes the form of a rejection of all public activity and the claim that all services and all valuable activities are private, not public.
My colleague Walter Russell Mead has also been covering the entitlements problem that pensions pose. He has an excellent post on the current dispute over pensions at the NY Times. The Times staff is considering a strike to defend its defined benefit contribution plan—a plan that guarantees a certain yearly payment until death. These pension plans are the best of the best for workers, but as workers still retire at 65 and live longer, they are bankrupting the companies that offer them.
Thus, the Times, like many other companies, is seeking to switch over to a defined contribution plan, one that pays out a pension that is somehow related to what one actually puts into it. These plans risk reducing a worker's standard of living in retirement, as do 401k's. Mead's essay is clear in addressing the entitlement of the Times' staff, which insists on protecting its benefits even if it destroys the paper for which they work. You can read Mead's post here.
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.