Saving Pensions Will Require Unions To Face Reality

“Not surprisingly, within moments of news of Detroit’s bankruptcy, pension scare mongers took to their pedestals to place all the blame on pensions. California, Los Angeles, and other governments would surely follow Detroit’s footsteps in short order, they cried. It’s simply not true, like most of the claims made by the anti-pension soldiers who have been trying for years to take away the retirement security of firefighters, teachers, police officers and other public servants.”

Ralph Miller, President, LA County Probation Officers’ Union, AFSCME, Fox & Hounds, August 20th, 2013

Miller has a point. California is not Detroit. California’s population has not imploded, nor will it. Detroit’s economy was reliant on one industry, California’s huge economy is diverse and relatively healthy. Turning California around, while daunting, is going to be a lot easier than turning around Detroit. And, yes, it was a collapsing industrial base and an imploding population that did as much or more than unsustainable pay and pensions to destroy the city of Detroit’s finances. Fair enough.

Where Miller goes off the rails is when he then infers that equally bogus are “most of the claims made by the anti-pension soldiers who have been trying for years to take away the retirement security of firefighters, teachers, police officers and other public servants.”

Few, if any pension reformers want to take away anyone’s retirement security. But as a nation, we are currently on track to pay more money each year in pensions to retired government workers than we pay in Social Security to everyone else. The average pension for a recently retired government worker in California who logged at least 30 years of full-time service is about $65,000 per year. The average Social Security benefit for a private sector retiree who logged 40 years or more of full-time work is $15,000 per year.

This is not a valid social contract. Government workers, through these pensions, are no longer required to endure the economic challenges facing the taxpayers they serve. And despite rhetoric and reporting that confuses these issues, Social Security is a relatively healthy system that can remain solvent with minor adjustments to withholding and benefit formulas, whereas public sector pensions are going to catastrophically collapse the very next time there’s a bear market.

There are really two primary issues that ought to be the focus of debate: (1) What is a realistic rate of return, after adjusting for inflation, for pension funds over the next 30 years? (2) If you don’t believe that pension funds are going to continue to deliver 7% returns, 4% real returns after inflation, year after year for the next three decades, do you fix the system by converting participants to an adjustable defined benefit, or by converting participants to a 401K?

To the first question, if you truly believe real rates of return are going to hover somewhere north of 4% per year, forever, then you should have no trouble agreeing to an adjustable defined benefit. This would simply be a modification of pension formulas, whereby pension benefits would be reduced by a uniform percentage, applied to everyone – new hires, active employees, and retirees – by as much as necessary to maintain an adequate funding ratio. By applying this formula to everyone equally, the amount of sacrifice for any given participant is minimized.

The alternative, should markets turn downwards, is to intensify attempts to protect veteran employees and retirees at the expense of new entrants to the public workforce. The fatal problem with this method is that new entrants have lower rates of pay and a very long wait until they retire, both factors that minimize any benefit to the fund’s solvency by reducing their pension formulas.

The other alternative, which many pension reformers have determined is inevitable given the intransigence of public sector unions to even consider options such as an across-the-board adjustable defined benefit, is to go to a 401K defined contribution plan. That would force every individual to hope they successfully pick the best investments, subjecting them to the caprice of a highly volatile, highly manipulated global market. It would also force every individual to hope they die before they run out of money. It is not a preferable option. It is as brutal as it is whimsical.

What government union leaders and their members must realize is they have set themselves apart from the rest of the American people during a unique period in our nation’s history. Between 1980 and 2030 the percentage of Americans over age 65 is projected to double, from 11% to 22%. At the same time, the costs of healthcare march relentlessly upwards – partly because medicine can do so much more to improve the length and quality of life. Moreover, we are entering the terminal phase of a global debt bubble that has been inflating at least since 1980. It’s about to pop. Passive investment funds are not going to be coining money like they used to.

Government unions can continue to demonize wealthy people, hoping enough voters will be duped by this scapegoating, but they must understand that “wealthy people” is becoming synonymous with “old people.” Their rhetoric, therefore, will foment discord between generations. Yet the reality is quite different. If things continue the way they are today, the discord, and the wealth disparity, will not be between old and young, but between old government workers (and the super rich, of course), and everyone else – young and old private sector workers, as well as newly hired government workers.

Ensuring that every American can enjoy sufficient retirement security to allow them to live their final years with some measure of dignity is not going to be easy. The solution is to lower defined benefits for all government workers to financially sustainable levels, as needed, and more generally, to move towards applying the same set of taxpayer funded benefit formulas and incentives to all American workers equally, for them to earn regardless of whether or not they work for the government.

*   *   *

Ed Ring is the executive director of the California Public Policy Center and the editor of UnionWatch.org.

18 replies
  1. Tough Love says:

    Ed, While I agree with what you have stated, summarized by your words … “lower defined benefits for all government workers to financially sustainable levels”, you didn’t focus enough on a specific goal …. so I’ll offer one:

    Public and Private Sector “Total Compensation” (cash pay + pensions + benefits) should be very near equal in comparable jobs (or if directly comparable jobs do not exist, then comparable to jobs with comparable risks, knowledge, and skill sets).

    Right now, in all but a few very high level occupations (e.g., doctors, lawyers, certain IT professionals) “cash pay” is very close in the Public and Private Sectors. However, with Public Sector pensions and benefits universally multiples greater in value than their Private Sector counterparts, these Public Sector pensions and benefits have a LONG way to come down for that “Total Compensation” equality top be achieved.

    History tells us that the Unions will fight even minimal attempts to make such reductions, let alone the much greater one truly needed.

  2. SeeSaw says:

    The average you quote for certain government retirees is a cherry-picked group. The true average for CalPERS annuitants is $26,000 per year. The bottom line is what counts–not what a few lucky individuals receive. A SS recipient making $15,000/yr. would need more total income within its family group, just to pay the premiums on medical insurance to supplement Medicare. Thankfully, this is a capitalistic society where individuals are lawfully allowed to earn whatever they can. There is no law requiring everyone in our society to earn equal cash pay or benefits. Don’t worry about the public pension annuitants–there are plenty spouses, children, grandchildren, relatives, and others in need, who benefit from those public pensions.

  3. Editor says:

    SeeSaw – as a prolific commenter on these topics you must be aware that “cherry picking” could also be a charge leveled at anyone who claims the $26,000 average pension is representative of what someone can expect who spends their whole career working in government. As you well know, the $26,000 average is skewed downwards by participants who only worked a few years in government service, barely vesting a pension, as well as by participants who retired over 10-15 years ago, before pension benefits were enhanced.

    Anyone who has retired in the last 10 years or so after working 30 years or more for state or local government in California is, on average, collecting a pension of well over $60,000 per year. If someone didn’t work at least 30 years, then to the extent they were working somewhere else, they would be expected to be accruing Social Security benefits and saving via a 401K; i.e., doing what the rest of us have to do for our entire careers.

    The only way to truly represent what state and local government pensions are paying to retirees, and costing taxpayers, is to look at what pensions cost now and in the future for people who retired after a full career. For anyone who didn’t work 30 years or more, there is another retiree who also held that position for a time – so the overall costs to taxpayers are unaffected.

    You should understand this, given your ubiquitous presence on websites covering this topic.

  4. Tough Love says:

    Editor, too bad you didn’t also respond to SeeSaw’s persistent comments that there is no reason for Public and Private compensation in similar jobs to be near equal.

  5. SeeSaw says:

    Anyone? I worked in the public sector for 41 years–36.4 years CalPERS service credit–eight years of that credit paid for out of my own pocket with no matching employer contribution–my pension was less than $50,000. Of course, the average includes everyone who gets benefits. That is why it is an average. Nothing cherry-picked about that number–it includes everyone.

  6. SeeSaw says:

    Perhaps the Editor and TL, should come to the realization that they are continuing, on a daily basis, to flog a dead horse! And then, continuing to criticize, on a daily basis, my efforts to make sure that people with lawfully earned pensions do not lose them. Yes, TL, there is no law saying that employees all over the country should make equal amounts, when it comes to cash and benefits. This is the United States of American–not Communist Russia–not Cuba!

  7. SeeSaw says:

    Self-correction: It was eight years’ part-time work, determined by CalPERS to be four and one-half years’ pension credit–paid for out of pocket.

  8. Sully says:

    In following the pension comments here and other sites, the common belief (and not just SeeSaw) is that they deserve what they’re getting. The private sector is just a necessary evil to be contended with while reality is the public sector is the necessary evil.

    When you consider the 1.9 Trillion economy of CA, how much does the public sector generate on a percentage basis vs how much is it getting back in benefits. Then throw in the private sector and how much its giving vs getting.

    Before Calpers claimed they could increase pensions by 50% with no cost to the employers (1999) the pensions were only a mere fraction of the current escalating budget deficit. Ooops, I made a mistake – Pete Wilson was governor and there was a huge budget surplus of some 8 – 16 billion, depending on the figures you use. Gray Davis managed to piss it away in his first term plus add another 20 billion deficit mostly in increasing pensions and the size of state government (by 25%).

    How many private sector taxpayers had a say in all this government spending? I don’t remember ever being asked to sell the family ranch so some lackadaisical government worker could retire with a Greek pension.

    Most government employees that now have 30 years in, and are ready to retire, were never promised these ludicrous pensions when they were hired yet many are managing to qualify to receive them and really believe they are entitled to them.

    So the pensions that are now escalating the budget deficit were never originally promised to the people receiving them, now however, the managers are literally getting life styles of rich type pensions and are leading the charge to bankrupt the entire state. These must be the first to be quashed and then put a maximum limit on govt pensions and reduce the COLA to something more in line with CPI or other Fed Reserve baloney.

  9. Tough Love says:

    Seesaw, I suppose we’ll just have to “agree to disagree” as to whether those who work in a similar capacity in the Public and Private Sectors should have near equal “Total Compensation”.

    I’m not sure exactly what you mean by “flog a dead horse” (perhaps that being my strongly advocating for material Public Sector pension reform), but perhaps the axe likely to fall on Detroit’s Public Sector workers (surely with many other cities to follow) could have been avoided if material reforms had been made years ago in the earlier stages of this “pension tsunami”.

  10. Tough Love says:

    Nice comment, but Public Sector COLAs should be no greater than Private Sector Pension Plan COLAs … were are almost ALWAYS ZERO.

  11. SeeSaw says:

    You live in a Constitutional Republic, Sully. You have a vote–that is your, “Say”. I don’t think it would be productive for every individual to sit at the Table on every situation–not enough time to do that, and your head would spin. I am thankful that I live in a blue state. You may want to live in a red state where everyone has the right to minimum wage and they don’t have to join those pesky unions and possibly earn enough to pay the bills. Fortunately, we have choices in where we want to live and with whom we choose to associate.

    I would take Gray Davis over Pete Wilson any day. Wilson was the one trying to piss it all away. And anyway, the 3% formula was not widely adopted, throughout the state work forces, except for public safety. A 50-year old Public Safety retiree with 30 years is extremely rare–in my 41 actively employed years, I did not know one. The 3% formula has been abolished in the new pension reform law–you can rest easy. For miscellaneous employees, there was no 50% increase anyway–the maximum formula was already 2.418%. Nothing happens without taking baby-steps first.

  12. SeeSaw says:

    Well, TL, I received the maximum CalPERS COLA of 2% this year–my ABC medical insurance premium increased by 9+ percent. You have no reason for thinking that we should not have those cost-of-living stipends, except for the fact that you are resentful, and you do not have the personal, power to control everything. You could be a good aid for “Assad”–just gas everybody, and you won’t have to worry about giving out COLAs. America–the greatest country in the universe! I’m not leaving until my natural life has run its course.

  13. Sully says:

    SeeSaw, you’re right I did have a vote, however it came in the recall election to boot Davis out! I can’t wait for the day the people of the Great State of California will once again rise to the occasion to out all these union controlled puppets in the state legislature and return my birth place to the Golden State instead of the Beholden State it’s now become.

    Also, no where in my post did I mention minimum wage or reducing current pensions, except for the over 100k group, just limiting ALL pension in the future. After, of course, quashing the ludicrous pensions that the over paid managers are now getting (see Alameda County Manager).

  14. SeeSaw says:

    I agree about the over-paid managers, Sully. My former CM, gets over six times more than I. (I have no animosity–just stating it to make the point.) What is disgusting, is the blaming of unions for the pension excesses, when those getting such are not from the unions. Oh boy, your vote for GAS sure turned out good, didn’t it! You were pretty naïve to think that a movie star could run CA better than Gray Davis.

  15. Sully says:

    While an actor wasn’t my first choice, the local dog catcher could have done a better job then the inept Davis. Someone that held the position of State Controller for eight years should have been able to read a balance sheet and realize that the dot-com bust was also decreasing state revenues and acted accordingly instead of continuing the spending spree.

    But, you do have your hero in the equally inept Jerry Brown.

  16. SeeSaw says:

    There is nothing inept about Jerry. I don’t agree with him on everything. He is pragmatic, and much pain results for many. Nevertheless, JB is a seasoned public servant and he is sincere about his love for the State–not looking for personal power like his last opponent.

  17. Robert Mitchell says:

    The dialog between TL and SS is all over these sites, along with Al from Colorado whining about colas. The self-serving judges have spoken: no cutback in benefits, even if the legislature and governor say so. So now we just have to figure out how to pay for these crazy forever promises.
    I say two things should change: first, the 4% margin of investment return over inflation is too optimistic, and should be closer to 2% like the rest of the work pensions.
    Second, benefits should be paid for each year as they are earned, including spiked benefits. Lies about the true cost are just ways to push the bad news onto our children with higher taxes.

  18. Tough Love says:

    I disagree that (as you stated) ….. “So now we just have to figure out how to pay for these crazy forever promises.”….. feeling that finding a way to NOT pay for these grossly excessive promises, letting the Plans fail, and ultimately reducing these pensions is the better and FAIRER (to Taxpayers) response.

    I do however agree that we must fully fund promised pensions accruals AS EARNED. California Cities that try to do so will VERY quickly realize that these promises are EXTREMELY costly and unaffordable, being so BECAUSE the promised pensions are indeed FAR FAR too generous.

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