We have been warning readers about the pension crisis for a few years now. In a nutshell, the problem is the following: California public employee unions - which are virtually unregulated despite the fact they operate in the uncompetitive public sector - have pretty much taken over California’s state and local governments. In recent years they have negotiated pay and benefit increases so dramatic that the average government worker in California often earns 2-4x what globalized private sector workers earn to do jobs of comparable worth. This dramatic disparity is largely due to the value of their retirement pensions. The present value of what someone collects in retirement must be applied to the years they work, in order to correctly value their annual compensation. And by that measure, pretty much every employee working for the state of California is a millionaire.
Please note there is a huge difference between unions that operate in the competitive private sector, and unions that now arguably control our public sector. Also please note this commentary is in no way meant to disparage the good men and women who work in the public sector to perform vital services for us. Moreover, this commentary is not suggesting we eliminate government services - on the contrary, this commentary simply advocates making taxpayer funded government services and benefits apply to all workers equally. Currently the public sector serves itself first, leaving the scraps for the taxpayers. This must be challenged.
During the internet bubble, then the housing bubble, most financial analysts understood we were experiencing unsustainable economic growth. But this didn’t stop the public employee unions from using these temporary surpluses as an excuse to serve their members at the expense of the taxpaying private sector workers. Crowing about excessive ”executive compensation” collected by an insignficant handful of corporate executives, they demanded endless hikes in pay and benefits. The fact that they should have been comparing their compensation to their ordinary counterparts who work in the private sector was a fact they conveniently ignored. If politicians opposed them, they could be crushed in the next election. The fact their pension funds invested in the same evil corporations they routinely demonized was also conveniently ignored.
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| Schwarzenegger’s disastrous attempt to reform the public sector in 2005 was, ironically, perhaps California’s last chance to financially guarantee their state worker pensions. |
Back in July 2004 I recall reading an ad in a local newspaper placed by someone who held regular classes to teach people how to get jobs with the State of California. The ad said “Land a State Job and Become an Instant Millionaire.” I read the ad closely, and kept a copy.
Space and copyright laws prevent publishing the entire text of this ad, but it was factual, and filled with comments like the following: “The California state government provides a “defined benefit” pension plan to each of its employees. Such “defined benefit” pension plans are far more generous than any 401K or defined contribution pension plan available from any other employer in the state! In fact, the plan is so generous that it makes the average state employee a millionaire after only 22 years of work!”
In this ad and others, written with an astonishingly complete lack of irony, the writer explained in detail how much an employee would have to save every year in order to acquire sufficient wealth to retire with an annuity this generous. In other ads, the writer explained how many days off California’s state workers receive - holidays, personal days, vacation, comp. time, and the “9/80″ program where they get yet another day off every two weeks by working nine hour days for nine working days in a row. Show me an example of a conscientious salaried worker in the private sector who doesn’t work nine hours a day! In all, most state workers get between 50 and 75 paid days off per year. There is a staggering cost for all this.
Now the chickens are coming home to roost. For years, California’s public employee retirement funds - and others in other states - have overestimated the rates of return they could earn, at the same time as they underestimated how long their beneficiaries would live. Despite being the biggest collection agencies the average local government has ever seen, and despite being able to heavily influence our elections, and despite salivating over the prospect of collecting carbon auction proceeds (the real reason “the war on global warming has only just begun”), the unavoidable truth is this: California’s public employee pension funds are no longer anywhere close to fully funded. Huge reforms are finally going to come - initiated not by political reform, but by fiscal reality.
The good news is by liquidating public employee retirement funds, and instead giving government workers social security like the rest of us, several benefits will accrue to society:
(1) What’s left in these public employee retirement funds can be transferred to the social security administration, bolstering the solvency of that fund.
(2) All workers will receive social security, instead of public sector workers receiving far more generous pensions. Having the same retirement formulas apply to all workers will create the critical mass of voters, at last, to demand genuine upgrades to the social security benefit.
(3) Public employees will no longer be slaves to their pensions - they can try out work in the private sector. Of course in the private sector they will no longer get 50-75 days off every year, but at least they won’t be slaves to their pensions.
(4) The biggest liabilities on state and local government balance sheets, their payables to the state employee retirement funds, will be wiped away. Nationally, eliminating these unpayable trillions in debt may very likely prevent the great depression of 2010 from happening.
(5) Government operating deficits will disappear. State and local governments will be able to fund investment instead of issuing bonds (translation, raising taxes - debt service on a bond is an expenditure, too, requiring tax revenue to service). With payments to public employee pension funds abolished, more cash will be able to go into public works and better public sector services.
For more on the pension crisis and how public sector unions and environmentalists have both helped create this crisis and are attempting to stop reform, read: Unionizing Silicon Valley, Unlocking California Gridlock, California’s Global Warming Act, Public Sector Reform, Unions, Ideals vs. Reality, Unions Aren’t Green, CEQA Hijacked, and California’s Deficit.
October 7th, 2008 at 8:33 pm
What a load of crap! I put good money into my California public retirement fund and I have no intention of bailing out a failed state government! Our country/state have dropped the ball leaving it up to the individual to look out for themselves. Well I have, and those that haven’t need to own up to their personal failures.
October 7th, 2008 at 8:36 pm
Mr. R. Rat, with all due respect, even if you did make elective contributions to your retirement fund that were deducted from your pay, your total contributions will almost certainly represent a very small portion of what you are promised to get back when you retire - here again, the disparity between your contributions and your benefits - compared to social security deductions and social security benefits - is gigantic. It’s just not right. And unless you only recently started to work for the state, the retirement benefits you are now being promised - since they have been continuously and retroactively upgraded over the past 10+ years - are far greater than anything you expected when you started your career. You and all of your counterparts in the public sector have no business treating yourselves as special citizens. You should honor all labor, not just your own. You should collect social security like the rest of us. Maybe when reform comes, those of you who are longtime state employees can keep most of your retirement benefits, since that is what you had planned on. But incoming state workers will need to be treated the same as workers are treated in the private sector. All working American citizens should have the same taxpayer funded formula apply to their retirement benefits. It’s only fair.
October 8th, 2008 at 2:10 am
“…You and all of your counterparts in the public sector have no business treating yourselves as special citizens…”
Pardon? You know what makes me special? Unlike you, I had the foresight to work hard, real hard for my living. For 40 years I worked in the streets for a couple of things. I worked to serve my community and have a retirement that will serve my needs when I get old. Through my choices I’ve raised a family and paid my just dues to society through volunteer work and adoption. How dare you assume that your ilk take, take take…rather than give back to the people that have given so much and for so long. Would you prefer that I give my home up as well? How about the shirt on my back and the blisters on my fingers. You want my shoes too?
Through consistence and service is anyone to gain rewards from their work.
As I have told my children, your rewards in any job comes through performance and consistence.
Take some time to look up the word ‘vested’, and union. Your ideas as stated are socialistic.
Now, please go off into your corner.
Thank you.
October 8th, 2008 at 3:30 am
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October 8th, 2008 at 8:12 am
This commentary is spot on.
Here’s a similar piece with a somewhat different strategy that I worte for in the NORTH COUNTY TIMES (San Diego County, CA). I’m a columnist for them. http://www.NCTimes.com
Like you, Ed, I’ve been warning of this inevitable debacle (market meltdown or not) for over a decade.
RICHARD RIDER OP-ED
The Market Meltdown and Your City Taxes
The market’s dramatic decline adds to (and grows from) our other financial problems – the mortgage tomfoolery, high energy prices, failing businesses, soaring unemployment, record foreclosures and massive bailouts. It’s unnerving, if not frightening.
But it’s no big deal for one large segment of Americans – government employees. Most governments are still hiring, not firing. Salaries are increasing, not decreasing. Taxes and government debt are going up, not down.
Most government workers still retire many years before private sector employees. Their opulent pension benefits are fully guaranteed, regardless of their pension fund’s performance.
It’s times like these that should remind government employees how much better off they are than the private sector rubes who pay the taxes. Instead, they whine about how tough things are for government employees – plus, they can’t feel the love. Incredibly, our local government employees have the audacity to call beleaguered San Diego County taxpayers “cheap” – demanding that we pay ever higher taxes.
If your pension is a 401k plan and/or an IRA, you’ve seen the plunging value of your retirement. Almost all private sector pensions are variations of these “defined contribution” (DC) plans: You and hopefully your employer put money aside in your earmarked account, but what you get is strictly dependent on how well the investment funds perform. No guarantees.
However, if you are a government employee, you inevitably have a “defined benefit” (DB) plan: Under a generous formula, your pension is defined as some percent of your highest salary times the number of years worked. Regardless of how well the pension fund does, or how little money is put into the fund, these benefits are guaranteed by your employer – a.k.a. taxpayers.
So, as it turns out, you taxpayers have two different pension plans to worry about – your own, and “your” government employees – working and retired. If there is any shortfall in the funding or performance of government pensions, it must be made up 100% by the taxpayers.
One thing’s for certain – if you live in a Southern California city, (indeed, just about America) your city workers’ pensions are seriously underfunded. ALL our cities are in that position. In addition, your county workers’ pensions are underfunded. Plus your state workers’ pensions. And that systematic underfunding was true BEFORE the market meltdown.
How did this happen? From a politician’s standpoint, it’s the perfect labor union concession – instant, retroactive, underfunded DB plan increases, where the true cost doesn’t become apparent until years later (usually after the guilty politicians have retired).
Moreover, the politicians, city managers – everyone in the government – benefits from these luxurious pensions. There’s no taxpayer voice in the process.
Compliant actuaries use outdated mortality tables that underestimate lifespans by five or more years. Unrealistic annual earnings rates are assumed, with disastrous consequences when earnings fall short, let alone turn negative. DB plans all fail to perform as promised, with taxpayers getting the bill for the shortfall.
We must end DB plans for new government hires. But the damage has already been done.
Therefore we need to contract out every possible government function to the private sector, getting politicians out of the pension giveaway business. That, plus the threat of formal bankruptcy, are all we taxpayers have left as weapons.
October 8th, 2008 at 8:15 am
Ed, if you still have it, I’d love a copy of that “instant millionaire” ad. That deserves further dissemination.
Can you scan it and send it to me? Your website has my email address. If you need to use a fax, I can provide that number.
October 8th, 2008 at 12:29 pm
Great commentary-and R. Rat is your typical government employee who thinks they are “entitled” to ripping off the taxpayers-because the fact is illegal retroactive pension spiking is where the MAJORITY of his pension came from-and I would be willing to bet he paid nothing, or close to nothing, as his employee portion of the contribution to his pension.
Hey Mr. Rat, take a look at this and read it real good, you’re next buddy;
http://www.wsws.org/articles/2005/may2005/unit-m13.shtml
Like Richard Rider, I too am from San Diego and have been saying the EXACT same thing you have commented on here.
I too get the “Well CEO’s are making billions” argument from overpaid, over pensioned government employed welfare queens.
I have a feeling that after the market drops into negative territory for the year that Calpers will be heavily underfunded–just like 75% of all CA muni’s are today.
BTW-here is a recent paper on public pension underfunding;
The Intergenerational Transfer of Public Pension Promises
Robert Novy-Marx
University of Chicago - Graduate School of Business
Joshua D. Rauh
University of Chicago - Graduate School of Business; National Bureau of Economic Research (NBER)
September 2, 2008
Chicago GSB Research Paper No. 08-13
Abstract:
The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars). Adjusting for risk, the true intergenerational transfer is substantially larger. Insuring both taxpayers against funding deficits and plan participants against benefit reductions would cost almost $2 trillion today,**** even though governments portray state pensions as almost fully funded. ****
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1156477
October 16th, 2008 at 12:42 pm
The author seems to like to compare the public to the private sector. While this may work for certain positions, would the author care to direct me to where I can apply for my present position as a deputy sheriff in the global ‘private’ sector?
“What’s left in these public employee retirement funds can be transferred to the social security administration” The author must be on drugs, enough said….
October 16th, 2008 at 1:14 pm
Lee - you’re right, it isn’t easy to make comparisons between public sector jobs and private sector jobs. The notion of comparable worth, which the feminist movement once wanted to use to regulate salaries of, say, librarians vs. heavy equipment operators, was considered unworkable because it would have required government regulation of compensation packages within the private sector. But the notion of comparable worth is worth weighing when one compares the salaries of public employees to people in the private sector - because taxpayers are paying the bill! Nobody is saying it is easy.
Also complicating this question is the gross disparity in compensation within the public sector. A sheriff in New York or Florida or Texas may earn a far different rate of pay than one in California; even within states, pay rates vary widely. But the question is how much is too much? In California, for firefighting positions in many localities, the number of applicants dwarfs the number of openings, time after time. This would suggest getting one of these jobs pays far more than most of these applicants would be able to earn doing anything else. That would suggest they are making too much, and the taxpayers pay for it. If you apply the present value of retirement packages, plus paid days off and overtime packages, many of these folks are making more than Obama’s “rich person” threshold of $250K per year! Very few of us working stiffs in the private sector, even those who are highly educated and carrying huge responsibilities (and liabilities), make that kind of money. In the public sector when you include the value of present and future (retirement) benefits, it is common to make that kind of money.
So how much is too much? Where you work, you may be underpaid. But in California, public employees are rarely underpaid. And they have, through their unions, acquired so much power that they pretty much exercise absolute control over California’s legislature and many if not most of the county and city governments. This is not democracy.
It is easy to suggest that merging social security and public employee pensions funds is a zany idea, but I happen to agree with the author. All Americans should have their taxes going towards providing the same deal for all American workers when they are old. It is not right for public employees to retire in their early 50’s with benefits many times greater than what social security pays, while private sector employees have to wait until they are in their mid-60’s to retire. And since private sector workers now make LESS than public sector workers, how on earth are they expected to save for retirement? Only when everyone, public or private, gets social security, will we finally reform and upgrade social security. Maybe special provisions can be made for people who take extra risks to protect the public, but again the question must be asked, how much is too much?
Finally, it is hard to venture these reformist suggestions if you believe in government and respect government workers, especially those of you in public safety jobs. Like the author, I am not a libertarian, and I have great respect for the work you do. But how much is too much, and how are we going to start having government serve all the people again, instead of just government workers?