The Urbanophile has a good post on crisis being a time when there is opportunity for government reform. I recommend reading the entire thing – has some kind words for Gov. Daniels. But, what caught my eye was when he touched on the issue of pensions. He’s right that pensions are a huge unfunded liability, and he suggests that now might be the time for reforming how we deal with them. But, I wasn’t entirely clear from reading if and how he might be proposing we deal with the pensions that are already owed. But, he mentioned some facts that – in my mind- argue against messing with the pensions that are already owed:
Today, once you’ve got X number of years in, you are almost handcuffed to your government job for the duration even if you hate it because the value of that [defined benefit] pension is so high. That’s why you always face a battalion of surly employees when you go to renew your driver’s license. Also, it creates a recruitment issue. Lots of people might want to spend some time in public service without making it a career, but it can be hard to do. In many places (though by no means everywhere), government pay is below market on a cash basis, with the balance made up (often more than made up) by generous pensions. So for someone who might want to spend say 3-7 years in government, that’s a huge disincentive. They would be paid below market and not get the pension. If they were paid market and had a 401(k) they could take with them, that’s a lot more attractive option.
So, the people already in the system have made that trade. They have, literally, traded their lives based on this promise. Instead of doing other things with their lives, they spent hour after hour, day after day, doing a job in public service when they, perhaps, could have been doing something with their life that they loved better and/or that paid better. Perhaps the rationale was that, with a defined benefit pension, they could securely retire sooner – possibly to spend their time on things they enjoy or working in some other capacity and making up the income they lost. To pull the rug out from under them after they held up their end of the bargain strikes me as immoral.
That said, it is a big funding problem. But, it probably goes without saying that I don’t view stiffing creditors as a great way to deal with your funding shortfalls, particularly when those creditors are employees (or former employees) who are owed for time spent in your service.
In my mind the one biggest distinction between government(state federal and local) and the private sector is that government has been set up to do the people’s bidding.If it doesn’t it means those elected are not vigilant or are in cahoots with what is going on,such as in Illinois (where my pension is paid) where those elected of both parties for decades systematically raided the teachers’ pension fund for general use,because it was money that was ‘just laying there’,and no one wanted to vote to raise taxes or cut anything.
The private sector over years has canceled agreed-to pensions and retirement benefits just because they can get by with it.If the stockholders are in agreement ,then anything goes: throw the rule book out the window.Profit is the goal,and if in jeopardy, everyone sacrifices starting from the bottom up.
We have no control over corporate America,but when we do have so-called control over government it amounts to license followed by panic and then identifying the scapepgoats from the do-gooders,and then full- scale media propaganda.
I was planning on retiring on my pension for years and I had it all worked out.Everything was clear. Teachers in Illinois cant draw Social Security unless they work enough outside the teaching system.The other teachers I know who collect medicare are women through their husband’s benefits..
So now they want to cut benefits? I’m 69, I have no SS,no medicare; only my health insurance which is partially subsidized by the state of Illinois,but still pricey.I thought I knew what to expect.
Im not crying poverty,but it’s matter of making the situation clear on a human level..Now ‘they pick on’ retired teachers as well as working ones. Anyone see a solution?I really dont,but I fear who is going to pay the most.Not the ones who caused it,to be sure. They’ve probably been voted out of office anyway.But ‘something has be done’ for the sake of fiscal sanity.
My tea-party brother-in-law voted for Brady, the losing Illinois govenor candidate.Why? Because he supported a law to allow carrying concealed weapons in public… No other reason he admitted to…Illinois is one of 2 states that doesn’t allow concealed weapons,and that’s what was intolerable in his mind.
This is a typical of voters all over the country.It’s an emotional issue that is easy to define and rallies the base,and slogans are easy.
Here is my beef with already earned public pensions: they are a product of a very corrupt system, where public employee unions use their considerable resources to elect politicians who give them bigger pensions.
As such, I do not view already earned pensions as untouchable. It is perfectly acceptable to compare a public employee pension with those available in the private sector, and cut accordingly.
Lou.. It seems to me that by working as an Illinois teacher, you traded a federal govt. health care entitlement (Medicare) for a state govt. health care entitlement. That’s a tough trade.
Am I correct in believing that teachers hired in Illinois now will qualify for Medicare when they reach the age requirement?
I don’t mean to give you marital advice, but do you know anyone of the opposite sex that catches your eye? (or possibly the same sex now that Illinois recognizes civil unions. I don’t know the answer to that question.) If you marry someone who qualifies for Medicare, you could get their benefits.
Paul C.
Yes, teachers hired after late 80s in Illinois will be covered under the SS system when they retire,but I dont think they have worked long enough yet ..
You can get married and receive Medicare because your new spouse has it? Medicare is something you have to earn by living together as I have always understood and you can’t get Medicare unless you’re qualified for SS ( 10 yrs ,or 40 quarters of work).Someone will correct me if this is not correct.Also state civil union laws are not valid for federal benefits unless the federal government has decreed so. Has that changed?
I’m in no way complaining about my choices . But I paid 8% on everything I earned for 35 years and that’s far more than what SS recipients have paid out.I was just to give insight anecdotally what a public pension is. People are too glib to compare apples and oranges as ‘just fruit’ or private with public as ‘just pensions’.
I dont know how the state and federal deficit problems will be solved.But certainly tax increases have to be included at some point..Probably deficits will gradually disappear with the return of good economy and with modest spending restraints..Probably if Obama is a one term president,after 2012 we’ll never hear about deficit reduction ever again.
It seems like all the wealth created by Reganomics or ‘free market’ over last 20 years evaporated overnight..What kind of wealth was it that disappeared so quickly?
Lou, here is what gets my goat. Living in the northwest and western Chicago suburbs, the teachers and administrators, especially the superintendents, were totally tweaking the system (I would say ripping off the system).
For example, I was living in the Northwest Chicago ‘burbs when the Sup for District 214 was about to retire. The school district TRIPLED her pay for the last year before she retired, because that determined how much she made in retirement. This is a common practice across Illinois, and is done for many public employees, not just school administrators.
Pensions in the private sector are generally set as a certain percentage of your earnings over your entire working life, so that they can’t be “tweaked” by increasing your salary the last year or two before you retire.
I don’t know what the answer is in Illinois, the system is a mess and extremely corrupt. That’s one reason that I don’t live there anymore.
Buzz: I went to Hersey, and owned a house in Mt. Prospect. I feel your pain. People game the system, then others have to pay for it.
Lou: My understanding is that if someone qualifies for SS, they qualify for Medicare. I am pretty sure if you are married to someone who receives SS/Medicare, you also can receive Medicare. That is certainly true if you’ve been married for 10 years (spouses recieve survivors benefits), but I can’t speak to whether there is an exception I am not aware of for newly married senior citizens.
I know DOMA disallowed the IRS from recognizing same sex marriage, but I am not 100% positive they did the same with Medicare (they probably did, but I haven’t researched it since I live in Indiana… but as Doug points out, it is only a matter of time before the federal govt. recognizes it.)
Tax increases are indeed necessary to fix the current mess and become solvent. However, I think that the outdated pension system is going to have to have to become a thing of the past.
Doug,
I’d agree that we shouldn’t gratuitously inflict a pension cramdown on public employees. But the notion that their pensions are sacroscant is not something I agree with. For a couple reasons.
1. They may have worked under the expectation that they would have that pension. But guess what, lots of people did lots of things under the expectation of future events. I was planning on Illinois income taxes of 3% not 5%. I’ll bet GM’s bond holders expected to get paid back, and to be first in line in bankruptcy, not get 10% on the dollar so that the UAW could get made whole. This notion that one particular group of people should be immune from the types of bad events and sacrifices everyone else made is ridiculous. It doesn’t even have to involve a loss of benefits. For example, my mother is a state of Indiana retiree. She retired at 58. She’s perfectly healthy. In fact, she’s working another job right now. There’s no reason public employees shouldn’t be expected to work to 65 or 67 just like everyone else. Keep in mind too that they have other benefits not available in the private sector as well, such an almost complete immunity from being fired.
2. In lots of places public employees don’t have clean hands. They’ve donated probably hundreds of millions over the years to campaigns and ballot initiatives to sweeten their own pot. Public employees aren’t some super-noble group of people better than everyone else. They are looking out for #1 just like you and me. A lot of these overly generous pensions are no different from the corporate subsidies that blight our land.
Having said that, Indiana’s public sector pay is ridiculously low and its pension benefits aren’t particularly generous. Frankly, I’m amazed at the quality of public employee Indiana does get given the salaries on offer. And the pension system, while majorly underfunded, is within the state’s ability to fix. I believe the fact that public employees in Indiana are at below market pay is a big reason no one is interested in tackling this issue. I can’t see why Indiana would need to forcible kick people out of the pension system, though looking at retirement ages might be something to investigate.
Governments are different, obviously, but with government and pensioners, I don’t see a debtor that can’t pay, but one that would rather not. And, I sympathize with that – my tax dollars are going to pay for pensions for services provided to previous generations. But, the same goes in a lot of cases for bond payments; and my guess is that lawmakers will find themselves more inclined to default on pensions than on bond payments.
I’ll have to think on this, but that might become my litmus test as to whether shortchanging the pensioners is a last financial resort or merely a lack of political will. If governments default on pension and bond obligations alike, I might regard it as fair. If they keep paying the latter while defaulting on the former, I probably won’t.
I don’t know why it’s more moral to confiscate my money to pay benefits to someone I never promised anything to than to give people who were in on a de facto corrupt political bargain as any corporate welfare privateer a haircut.
By the way, I don’t know anyone who is talking about taking away benefits already earned for past service. All of these discussions are about prospective reductions in future benefits for future service for existing employees not just new employees. That’s even the case in Illinois. Clearly, there’s nothing immoral about making someone take a pay cut on a go forward basis.
But isn’t gaming the system also part of the current free market scenario where all money is ‘free’?There have been no rules for anything and when you have a strong union or a strong corporate presence, the money is siphoned off to a targeted agenda.You pick whether you hate unions or hate corporations and then you demogogue the enemy so your own clan is saved.Unions are ideologically wrong in the free market system.I get on a case when so many of my family in Illinois work at Wal-Mart,the ‘only job in town’ Wal Mart also make their own rules,and I don’t feel I’m changing the subject. Wal-Mart does everything right corporationally speaking,and the horror stories are left for those working there.But for those who work there the pay scale is relatively good.My sister, for example, quit her job making beds in the motel 8 when she was accepted at Wal mart.Huge pay increase..Making beds in a motel 8 brings perspective.Some jobs are better than others.
We need more targeted rules for money flow generally,whether pensions or private contracts..It’s all a mess,favoring those who are in a position to game ‘the system’..When there is an economic collapse such as now,then it beomes a political game of blame victimization,because there is no mutually accepted solution.
Maybe one way to reform the current pension system would be go back and take away the last minute deals that raised pensions thousands of dollars by creative bookkeeping.Yes,it seems wrong even if legal.But then you’d have the problem of undoing legally negotiated contracts.Much of what goes as ‘corruption’ is legal,and that certainly includes the private sector. Just happens unions in Illinois do have lots of clout.
Thanks for clarifying that, Aaron – I wasn’t sure what kinds of proposals were serious possibilities. My objections fade dramatically when they become about prospective compensation.
Doug, it can still be a bit unfair to the employee at some level, since pension benefits are usually heavily skewed to the last years of service. That’s actually one of the prime vectors for abuse in places like Illinois and New York. An employee is given a huge raise in the last six month of his career in order to juice pensions for life. But even without the abuses, you can still lose more than a pro rata share of your retirement income with prospective changes. Having said that, a lot of white collar workers in the private sector already experienced this when employers flat out terminated plans, freezing benefits at future levels. (This actually happened to me – I think I’ll get $0.50 a month or something from my vested pension when I retire :)
By far the biggest problem IMO is not the level of benefits, but the ridiculously earlier retirement ages and associated gimmicks. In some places cops retire on a full pension at 50. There might be some exceptions for police and fire, but the vast bulk of government employees should not be retiring earlier than the private sector. They should have to stay to 65 to get benefits (67 for younger employees, with go-forward retirement ages indexes to life expectancy) like everybody else. The problem is that the government likes to “solve” current budget issues by encouraging early, not later retirement. This is a great example of how pensions are inherently corrupting of sound fiscal management.
The gimmicks are the juicing of salaries at the end, adding OT and bonuses to the pension benefit base, “double dipping” and more.
Again, 401k style pensions of the type everyone else has these days are the better way to go.
In Indiana, by the way, raising public sector pay, particularly at the senior management level, it critical. A city like Indianapolis simply can’t conduct a national search to hire someone with top professional and managerial talent. Even with a modestly boosted salary, they had to get their public safety director from White Plains (?) This means you either have to hire local or install a member of the political class that is willing to work for below money because compensation comes in other forms. Even middle management in corporations can make more than a department head in Indianapolis.
As a public employee, I do not believe that it is critical to raise wages for senior level management; however, it is critical to have people, with integrity, in these positions,who actually desire to serve the public (through their actions and not just their words) and not just themselves.
Many of them engage in self-dealing, self-promotion and self-preservation.
Also, public service should be just that – service. Unfortunately, many government employees talk about what they deserve etc. instead of being thankful the taxpayers fund them and provide them with a reasonable living. I don’t assume or expect that I should receive a taxpayer funded pension. If I get one fine – if it is reduced fine; but I don’t want any pension reduced so more funds can be channeled to wasteful schemes that allow a few to loot the taxpayers. Theft is theft regardless of who is stealing – some people seem to believe that some thieves are are more acceptable than others. I agree that the system encourages people (many of whom should leave) to stay and stay just to get that guaranteed pension instead of moving on and allowing fresh ideas and new energy from entering the scene.
Sure, the lower-level employees get screwed (at least the good ones), as they are generally not paid well, but do all or most of the real work. So-called management (and I am management – not just a complaining non-supervisor, in case you were wondering) typically will not (for the reasons above), make the basic changes that would increase productivity, save money, etc. because doing so, many times, would contradict the efforts of those who want to do nothing but hand out contracts to cronies, reward union buddies, reward campaign contributors, relatives, friends, etc. – whether they adequately provide the contract or public services is irrelevant – as the contract and employee managers role is to provide cover for those above them (not facilitate the work of those below them) and indicate everything is fine regardless of whether it is true or not. Then they have the retirement party, get the pension, having accomplished nothing but maintaining the status quo.