More Pension Truths and Why You Should be Very Angry
How much is that sweet retired teacher who lives down the street draining from your bank account? As the public employee pension mess worsens in California, little Rhode Island shows a way out.
In last week’s post, I focused on “air time,” a little known scheme in California and 20 other states that allows teachers and other public employees to pad their pensions at taxpayers’ expense. Also, not very well known is just how many of Joe and Jill Taxpayer’s tax dollars are going into the pockets of retired teachers.
In California, teachers contribute 8 percent of their pay to their retirement system. Where do the rest of the contributions come from? The current rates include 8.25 percent from the teacher’s employer and 2 percent from the state. But wait a minute. Who is the teacher’s employer? It’s the school district. In Los Angeles, for example, most school district money comes from the state, some from the federal government and the rest is local revenue. Hence, the employer’s contribution is all really the taxpayer’s burden, as the state, city and feds generate no money on their own. So it would be much more honest to say that 10.25 percent comes from the taxpayer.
Let’s look at the taxpayer’s responsibility another way. Sandy, a teacher I know, worked for 24 years in CA and retired at age 61. The amount of money she contributed into the system at retirement (including interest accrued along the way) was about $150,000. Sandy started collecting a pension of about $40,000 year (plus a yearly 2 percent COLA increase) for life. Whatever interest this money accrues over the next few years, Sandy’s contribution will have evaporated in about four years. So, at age 65 she will start living off other people’s money – whatever the “employer” (i.e. taxpayers) kicked in, whatever the “government” (i.e. taxpayers) kicked in and whatever is left, the taxpayers will have to fork over.
Should Sandy live to be 80, 15 years of her pension will be coming from the taxpayer – about $600,000 worth. (Note: there are about 755,000 current and retired teachers in the state as well as another 1.6 million in the California Public Employee Retirement System who can and are taking advantage of this system.)
Can anyone justify this? Hardly. The question then becomes what to do without impoverishing retired teachers and other public employees, while at the same time stopping the rip-off of taxpayers.
First, those who are retired need to show good will and agree to take a cut in their pensions. Additionally, those districts offering virtually free health care for life – many teachers are required to contribute only miniscule co-pays — need to curtail their generosity.
An example of what can be done just took place in Central Falls, Rhode Island. About to go under due to its suffocating union contracts, the city convinced firemen and cops to agree to accept a cutback in their pensions. Accomplished in a Democrat controlled state, maybe there is some hope for the rest of the country. Rhode Island State Treasurer Gina Raimondo recently gave a talk at the Manhattan Institute where she explained that they pulled off such a feat with “political nerve and good judgment.”
“The plan enacted in November cuts $3 billion of the state’s $7 billion unfunded liability by raising the retirement age, suspending cost-of-living increases until the pension system is 80% funded, and even moving workers into a hybrid plan that has a smaller guaranteed annuity along with a 401(k)-style defined-contribution plan.
“‘We decided we owe each other a bright future,’ said Ms. Raimondo, who said she and fellow Democrats (as well as Independent Governor Lincoln Chafee) came to the conclusion they could no longer afford the lavish promises made to state workers without destroying economic opportunity for everyone.
“‘More government revenue wasn’t an option because Rhode Island already suffers from the nation’s 5th highest state and local tax burden—a full 10.7% of per capita income, according to the Tax Foundation. Everyone in the pension system had to give something, from new employees to retirees.’ But a key to reform, Ms. Raimondo said, was to avoid blaming these beneficiaries for the mistakes of the past. ‘No finger pointing’ was her mantra, along with a corollary: ‘Math, not politics.’
“The first step was an education campaign to explain why a tiny state could not afford an unfunded liability that was more than $7 billion and headed north. This also helped to blunt union opposition. Once there was a consensus that the problem was real, citizens were ready to consider solutions.
“Ms. Raimondo said those solutions had to be discussed openly. Rhode Island’s reform process was so transparent that even when a draft bill to implement the changes leaked to the press before its formal introduction, it was essentially a nonstory because the reforms had already been discussed publicly.”
Those of us in California need look at what has happened in Rhode Island – recognition of a big problem, honest dialogue about it, transparency, shared sacrifice and a move to privatization – and start the ball rolling in that direction. Teachers and other public employee pensioners need to come forth and be a part of the process. They need to recognize that pension fund managers are clueless Pollyannas and that their unions have conned them by insisting that the current system is sustainable. This cannot happen too soon. If we don’t do something in the near future, the state could conceivably go into default and we could see the current exodus of business owners and taxpayers become a full-fledged stampede if California’s fiscal malaise gets any worse. I wonder how many Californians can fit into sensible little Rhode Island?
About the author: Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues.