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Teacher Union Pension Flim-flam

The public employee pension problem isn’t new, but a teacher union leader’s defense of it has sunk to new depths.

According to the Federal Reserve, public employee pensions in aggregate nationally are in serious trouble. Currently totaling $5.8 trillion, they are underfunded by $1.7 trillion. While all these pensions are draining public resources, Don Boyd, director of fiscal studies at the Nelson A. Rockefeller Institute of Government, charges that the teachers’ plans are a disproportionate part of the problem. And in a recent US News & World Report piece, “America’s Bankrupt Schools,” Lauren Camera sounds alarm bells, explaining that “Pension plans could be the culprit behind broke big-city school districts,” and goes on to detail the bleak fiscal situation that now burdens Philadelphia, Baltimore and Chicago.

Teachers’ pensions are funded to some extent by teachers themselves but the bulk of the payment is supplied by the school district (the taxpayer) and the local and state government (the taxpayer). It’s a “defined benefit” set-up whereby the teacher, upon retiring, receives a fixed monthly amount for life…no matter how much he or she has actually contributed to the plan.

While it is true that local and state governments are responsible for the looming disaster, the influential teachers unions have much to say about these policies and are leading the charge to maintain the unsustainable status quo. Randi Weingarten, president of the American Federation of Teachers, which represents many educators in the most fiscally challenged cities, claims, “People become schoolteachers knowing full well they will not command riches like in the private sector, but when they retire they can take comfort in knowing they have a pension to support them…The real culprit of the school systems’ trouble has been state governments’ support for expanding charter schools, voucher plans and other school choice policies,” which she argues have eaten into the budget for traditional public schools. She adds, “There is a common thread in how the Philadelphia crisis started, what happened in Michigan, and what’s happening in Illinois, where there is abandonment by these Republican governors or legislatures of urban city school districts.”

Where to begin?! In one fell swoop, she plays the “poor teacher” card, blames legislators who try to help kids to escape their failing public schools (which her union rules over) and Republicans. Of course, she omits the fact that every city and some states that are underwater are run by Democrats. As for her first claim, the myth of the underpaid teacher has no basis. Perhaps the most respected study to date, conducted by researchers Jason Richwine and Andrew Biggs (in which they account for all variables – including the fact that teachers work on average for 180 days, while private industry workers toil for 240-250 days) found that workers “who switch from non-teaching jobs to teaching jobs receive a wage increase of roughly 9 percent, while teachers who change to non-teaching jobs see their wages decrease by approximately 3 percent.” And that doesn’t include the very generous “Cadillac” healthcare plans that most teachers have and don’t pay for. So it would seem that teachers do quite well compared to other workers, even before their pensions are accounted for.

Weingarten’s comments about school choice are especially egregious. As explained by the Friedman Foundation’s Martin Lueken, “First, the states Weingarten cites are experiencing the worst pension crises, Pennsylvania, Michigan, and Illinois, do not even have strongly funded private school choice programs. Michigan has none, and fewer than 3 percent of the state’s students in Pennsylvania and likely fewer in Illinois are currently using any private school choice program.” He rightfully points out that schools of choice do not siphon public funds. “The truth is that school choice programs can improve the fiscal health of public school districts. Between 1990 and 2011, there were 10 private school choice programs in operation. Those programs saved a total of $1.7 billion. Another fiscal analysis on the Milwaukee Parental Choice Program demonstrated net savings of $37 million in FY 2009 from the program.”

Unmentioned in Weingarten’s misguided explanation was a prior classic. She is on record saying that, “Every dollar paid out in pension benefits puts $2.37 back into the economy.” Here the union leader blithely ignores that the same economic activity would be generated by taxpayer money if it were not diverted to pensions in the first place.

Another outrage that has been rarely acknowledged in the pension discussion is what is euphemistically called release time or, in some circles, “ghost teachers.” It’s a practice that allows public employees to conduct union business during working hours without loss of pay. These activities include negotiating contracts, lobbying, processing grievances, and attending union meetings and even out-of-town conferences. It has cost the state and federal governments billions to date, not including the pension time the “ghosts” rack up doing work for their union. Thankfully, reports about abuses in Michigan, Connecticut, Philadelphia and elsewhere have been brought to light over the past year.

Via legislation or initiative – whatever it takes – public sector employers must be made to set up 401(k) or “defined contribution” retirement plans as exist in the private sector. In this arrangement, the employer, employee or both make contributions on a regular basis, but there is no additional taxpayer involvement. However, until 401(k) plans are implemented – and the unions will fight tooth and nail to keep that from happening – so much of the money that should be spent on education, especially in our most blighted cities, will go into the pockets of not only retired teachers but to various other public employees…ghost and otherwise. And all the while the teachers unions claim that everything they do is for the children. In this case (and in so many others), they are doing it to the children, not to mention the ever-more-beleaguered taxpayers.

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 and the general public with reliable and balanced information about professional affiliations and positions on educational issues. The views presented here are strictly his own.

How the Tax System Favors Government Workers and Punishes Independent Contractors

The 2016 tax filing deadline is now just one month away. Which makes it timely to point out how unfair our tax system is to middle class workers who want to prepare for their retirements. It is also timely to explain how there is a completely different set of retirement rules, far more favorable, that apply to unionized government workers.

If you are a member of the emerging “gig economy,” or a sole proprietor running a small business, or an independent contractor, and if you are reasonably successful, then you paying nearly 50% of every extra dollar you earn in taxes. The following table shows the marginal tax burden for independent contractors who earned more than $81.5K and less than $118.5K in 2015:

Marginal Tax Rate for Independent Contractors
(for 2015 earnings > $81.5K and < $118.5K)

20160301-UW-ER-TaxRates

The challenges posed by this reality bear closer examination. Let’s say, for example, that someone in this category needs to earn more money, and they have an opportunity to earn a few extra bucks by taking on a side project. For these earnings, they will pay 25% federal, 8% state, 12.4% Social Security (as employee and employer), and 2.9% Medicare. And by the way, the employee’s portion of their Social Security contribution is NOT tax deductible. What if they decide to put that money into a 401K?

According to current tax law, private sector taxpayers can only defer up to $18,000 of their income into a 401K, up to $24,000 if they are over the age of 50. Contrast this to the unionized public employee’s pension fund.

If the payments into a public employee’s retirement account exceed $24,000 per year – which they usually do – they remain tax deferred. A California Policy Center study (ref. table 4) examining 2011 compensation for City of San Jose employees showed that the average employer contribution for a police officer’s pension (not even including whatever they may have also contributed via withholding) was $53,222 in 2011, more than twice the amount they would have been able to avoid paying taxes on if they were private citizens. For San Jose firefighters it was even more, their average employer pension contribution was $62,330 in 2011. And even for the miscellaneous employees, the city’s contribution exceeded the tax deferred amount allowed private citizens, averaging $26,164 – again, not including whatever pension contributions these employees may have paid themselves through withholding. San Jose’s case is typical.

So why aren’t public employees paying taxes on whatever annual pension contribution they make in excess of $18,000, or $24,000, depending on their age? Because there is NO practical limit on how much can be contributed into a defined benefit plan while still avoiding taxes. The IRS created the limit on how much you can put into a 401K in order to discourage people creating “abusive tax shelters.” But they did not apply this moral standard to defined benefit pensions.

Meanwhile, there’s not only a ceiling on how much the taxpayer can put into their 401K, but, of course, there’s NO guarantee that those 401K investments will perform. When a middle class self-employed person confronts a 48.3% marginal tax rate, if they can afford it, they are pretty much compelled to put money into their 401K. Then they can watch the S&P 500 and knock on wood. Since the S&P 500 is currently at the same level it was at back in June 2014, with governments and consumers across the world engulfed in maxed-out debt which renders them unable to continue to consume at the rates they used to, and global overcapacity idling shipping from Rotterdam to the Strait of Malacca, they’d better knock very hard indeed.

As for the pension funds for unionized government workers? If they become underfunded, though faltering investment returns, or retroactive benefit enhancements, or “spiking,” private citizens make up the difference through higher taxes and reduced services.

One final injustice must be noted: Once the private sector independent contractor retires, if they’re lucky they’ll collect around $25,000 per year in exchange for a lifetime of giving 12.4% of their gross income to the Social Security fund. And if that, plus their S&P 500 savings account’s 2.5% per year dividend income isn’t enough to live on, they’ll have to keep working. But wait! If that work earns them more than $15,710 per year, their Social Security benefit is cut by $1.00 for every $2.00 they make.

Let’s recap. A middle class private sector independent contractor pays a 48.3% tax on any income they earn between $81,500 and $118,500, which includes a 12.4% payment into Social Security on 100% of that income. Half of that 12.4% isn’t even deductible. If they invest money in a retirement account, there is at most a $24,000 ceiling on how much they can invest per year. If their retirement account tanks, there’s no bail-out. And if they still have to hold a job after they’ve finally qualified for full Social Security benefits after 45 years of work, there is a 50% tax on that benefit for every dollar they earn in excess of $15,710 per year.

By contrast, a unionized government worker in California collects a pension that averages – for a 30 year career – well over $60,000 per year (ref. here, here, here, and here). At most they contribute 12% into their pension fund via payroll withholding, in most cases much less. Their pension fund earns 7.5% and if it does not, the taxpayers bail it out. And when they retire, if they want to go back to work, there is NO penalty whatsoever assessed on their pension income.

Ensuring reasonable retirement security for Americans against the headwinds of unsustainable debt and an aging population is one of the great challenges of our time. And the biggest obstacle to finding solutions is that American workers do not adhere to the same set of rules. There is rather a continuum of rules, with unionized government workers at one privileged extreme, and independent contractors – those glibly lauded members of the “gig economy,” at the opposite end, paying for it all.

This is the context in which we have recently witnessed the irresistible alliance of Wall Street pension bankers and government union leadership annihilate the latest attempt at pension reform in California. Tax season brings it home in all its bitter glory.

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Ed Ring is the president of the California Policy Center.

When Union Bosses Become Employers

Sanctimonious labor leaders treat their employees very differently than their members.

While tales of union hypocrisy are as common as instances of Donald Trump sticking his Ferragamos in his mouth, there is one facet of union two-facedness that is under-reported – the role of union as employer. As mentioned in my post a couple of weeks ago, when union becomes management, it acts like any company trying to protect its bottom line.

In June 2014, the Association of Field Service Employees was upset that its contract had expired, and management had been slow to agree on a new one. Mike Antonucci points out, “This wouldn’t be all that unusual, except management is the National Education Association and AFSE is one of the unions representing staffers.” Clearly photos of picketing workers had to be an embarrassment for NEA, but when the bottom line is at stake, even the largest union in the country becomes a tough-minded employer.

When it comes to pension plans, public employee unions (PEUs) insist on defined benefit pension plans for its members. This means that boom or bust, retired government workers get paid the same amount of money each month in perpetuity. If there is a shortfall – and there invariably is – the taxpayer is on the hook for the difference. (To read about public pension issues and the havoc they wreak, go to PensionTsunami.com.) In a defined contribution plan – the 401(k) is typical for many employees in private industry – workers and their employers set aside a certain amount each month and that money is invested. When the employee subsequently retires, they are entitled to whatever money has accrued in their retirement account.

You would think that staffers who work for PEUs would be “entitled” to a defined benefit pension also. This is rarely the case, however, with the scenario in Philadelphia being the norm. As Watchdog.org reporter Evan Grossman writes, “Pennsylvania labor union leaders blast 401(k) plans they offer their own staff.” Typical of union leaders, Philadelphia Federation of Teachers president Jerry Jordan has long railed against using 401(k) retirement plans for PFT members as a way to curb skyrocketing pension costs. In fact, he and hundreds of thousands of teachers from Philly have been and will be recipients of a defined benefit pension and fight any bill – like Senate Bill 1, which would have moved teachers into a more taxpayer-friendly 401(k) plan.

But what about the 34 office workers employed by PFT? Yup, they are enrolled in a 401(k) plan. And the union leaders have never explained – because they can’t – why defined benefits are good for its members but not for its own staff.

As is well-documented, teachers unions all over the country insist on seniority and tenure “rights” (though these days, union leaders have taken to referring to tenure as “due process”) for its educators. But in March, the California Teachers Association up and fired Katie Howard-Mullins, president of California Staff Organization (CSO), the union for “professional departmental and Regional UniServ Staff.” No reason or explanation was given by CTA for its action. Whether or not Howard-Mullins had tenure or seniority didn’t matter. She got the boot. But CTA members, whether they are pedophiles, sexual assaulters or just plain lousy teachers – are provided much better treatment and much more protection.

CSO called CTA on its hypocrisy in its newsletter, saying that the union did not use progressive discipline, a “hallmark of a positive labor-management relationship” in dealing with Howard-Mullins. CSO summed up its position by encouraging its members to talk to CTA board members and let them know that “the principles of restorative justice, due process, and progressive discipline are not just good for students, not just good for teachers. Those principles should be applied to the people who stand with you every day to make your union stronger.”

Makes sense. But when you are a powerful union, you get to behave any way you want. Fairness, openness and due process are principles that only others must abide by.

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 and the general public with reliable and balanced information about professional affiliations and positions on educational issues. The views presented here are strictly his own.

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Important note for those of you in Southern California: At 3pm on Sunday, September 27th, the California Teachers Empowerment Network, along with the Association of American Educators, will be hosting an informational event in Long Beach. We will examine the Friedrichs and Bain lawsuits which could fundamentally alter the state of education nationwide, affect teacher freedom, and substantially change the political landscape in California.

I will moderate a panel discussion featuring lawyers and plaintiffs from both cases, and an audience Q&A will follow. The event and refreshments are free but seating is limited so registration is necessary To access a poster for the event, go here; to attend, go here.

 

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.

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