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Tuesday, August 10, 2010

The answer when liberals demand to know what cuts conservatives would make

Byron York discusses one way that we could start saving some big bucks - how about paying federal employees what average private employees would earn. We are in a time when the salaries and benefits of public employees dwarf those of employees in the private sector. These are the real two Americas.

The New York Times woke up to the problem this weekend when they wrote about the class war of government pensions where the average taxpayer has to work extra in order to pay for public employee benefits and pensions.
There’s a class war coming to the world of government pensions.

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.

The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.
States are going broke trying to pay the promises that earlier politicians made to those employees in order to buy their votes and support. Colorado is trying to do something about that by reducing the annual raises that those already retired get in their pension checks each year. And, of course, the retirees are howling. I can understand that they have made financial decisions based on those pension increases. But lots of people are facing cutbacks in this economy. Why should retirees be exempt? And why should the rest of Colorado fund these overgenerous benefits when it is driving the state bankrupt?
Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though. The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month. Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments, would need an immediate fixed annuity if they don’t have a pension. A 58-year-old male shopping for one from an A-rated insurance company would have to hand over a minimum of $860,000, according to Craig Hemke of A woman would need at least $928,000, because of her longer life expectancy.
The real fault lies with those politicians who sold future solvency for present-day electoral support. This is why public employees should never have been unionized. They aren't asking for benefits from an employer who must balance costs and profits. They are instead making deals with politicians who don't mind buying votes with the taxpayer money.

The WSJ uses the scandal
of Bell, California to remind Californians of what they are paying in pension benefits to government workers.
According to the California Foundation for Fiscal Responsibility, a nonprofit that advocates pension reform, Mr. Rizzo is hardly alone. The foundation lists 9,111 retired California government workers receiving pensions in excess of $100,000 a year. The top earner, one Bruce Malkenhorst, receives $510,000 a year for his tenure as city administrator of Vernon, California (population, 91). Not including health benefits.

These paydays are the inevitable result of the dominance of government unions in city and state politics. While most private workers have 401(k)-type plans that rise and fall in value with economic growth, unions negotiate guaranteed payouts that stay lucrative whether or not the cities can afford them. California Attorney General Jerry Brown is investigating the Bell episode, but he'd enhance his chances to become the next Governor if he proposed more ambitious pension reform.
Why shouldn't these government employees have the same type of 401(k)s that so many of the rest of us are looking to help us out in retirement?

Eileen Norcross and Todd Zywicki
have some recommendations of what needs to be done to address those promised pensions to public employees. It may be impossible for some state and local governments to arbitrarily scale back on those promises because of the way the contracts are written or their state constitutions' forbidding any decrease in the promised benefits. But the bill is coming due and the unions have no interest in the governments defaulting on their promises.
As legislators debate, the cost to taxpayers is growing rapidly. One-fifth of New York City’s budget was spent on pension and health benefits this year. The city’s $40 billion pension hole means that by 2016, that $6.8 billion pension expenditure will nearly double to $12 billion. While the city can in a worst-case scenario declare bankruptcy, the state cannot.

The alternatives in this scenario are bleak.

First is a federal bailout. But even if we can afford another trillion dollar plus bailout - a big "if" - should the citizens of the rest of the country foot the bill for the gold-plated pensions of Connecticut and Illinois retirees? And what reward does that provide for states that have acted responsibly?

Or states could end up simply defaulting on some or all of their debts. This hasn’t happened since the Great Depression. But 25 years ago, we didn’t expect General Motors to file bankruptcy - until excessive retirement benefits and escalating wages finally killed the goose that laid the golden eggs.

If public sector unions are truly interested in helping their members secure a decent retirement, rather than leading us all off a fiscal cliff, they will take proposed reforms more seriously. Freezing the Cost of Living Adjustments and reducing the rate of benefit accrual in public pension systems is a start.

Closing defined-benefit plans to new hires, in favor of 401(k) type plans, will also help - and will give younger workers the ability to take their retirement accounts with them if they move to a private sector job.

Unions should accept that getting most of a retirement benefit is better than getting it all, when getting it all comes at the cost of pushing the country into stagnation
That brings us back to Byron York's column based off of a study contrasting the average federal worker with the average private worker and recommending freezing those salary increases.
If Congress were to freeze federal pay raises until the private sector begins to catch up, the savings to taxpayers would be considerable. Heritage scholar James Sherk estimates that ending the disparity could save the taxpayers $47 billion a year. (A study by the American Enterprise Institute put the figure at $40 billion.) That won't get close to balancing the budget, but add up 10 years of that and the government will save significant money.

And it's done without cutting government services or subsidies. "In the past, the implication was that if you are spending less, then you are doing less," says Grover Norquist, the conservative head of Americans for Tax Reform. "But you could save money by paying public workers what you pay private workers and still do the same things."

Getting to public-private pay equity need not involve a sledgehammer approach. There are differences between the federal workforce and the private-sector workforce that pay reformers will have to take into account.

For example, government workers are more educated, older and more likely to be in managerial and administrative positions than the overall work force. That means they make more money, just as comparable workers in the private sector make more than less-skilled workers.

Reforming federal pay would take those differences into account. Highly paid federal workers who have the skills and experience to command high pay in the private sector would stay at the high end of the pay scale and might even see their pay go up. But others who make far more working for the government than they would for the private sector would likely have their pay frozen until it was closer to private standards. Nobody's pay would be cut.
As York recommends, such a plan would save billions every year. And Republicans would have a popular reply when reporters ask them what they would cut. And Democrats would have to explain to their constituents why public employees should be shielded from the government's economic woes.
In the Senate, Oklahoma Republican Tom Coburn has introduced amendments to the war supplemental spending bill that would freeze federal pay for a year. In the House, Republicans found a pay-freeze proposal was extremely popular with participants in the YouCut program, which asks the public for input on how to cut spending. When GOP leaders asked for a recorded vote on the measure, majority Democrats promptly shot it down. Still, the GOP sees pay equity as a winning issue. "If Republicans had thought that this was political death," Norquist says, "they would not have had that vote."

In the meantime, the problem is getting worse, not better. While the private sector has shed millions of jobs in the recession, the federal government has added nearly 200,000 employees to its rolls. That's more salaries, more benefits and more pensions. And the pay problem is replicated in states across the country; most of them have similar public-private disparities, and many of them are facing calamitous budget deficits.

Pay equity between government and private workers would help solve those problems. The next time someone asks, Well, what would you cut? -- conservatives have an answer.
And they can use that favorite buzz word of the liberals - equity - in arguing that it's time to stop taxing the little guy to pay for increasing benefits and salaries for public employees.


Phil said...

And now these profligate spending states and localities want the fiscally conservative states to fund their spending. Bailouts for states and localities that spent money they don't have. There should be a howl of protest if Congress enacts this legislation. If it goes through, I will be lobbying my state to give everyone ponies and swimming pools, since the whole country will chip in for them!

Stan said...

There are two different problems at work here. The first is the problem of public workers being unionized and cutting deals with politicians spending taxpayer money. The second is the problem of defined benefit plans in general. These can be disastrous in the private sector as you point out in the auto industry.

It is foolhardy by both the employer and the employee to bargain with dollars to be spent 50 years from now with income not yet earned. Companies go broke. Currencies devalue. Better to pay workers today from income earned today for work done today and let them invest their own money for the future.

LarryD said...

And there is an analog to the 401(k) for government workers, it's the 457(b).

The unions will resist the conversion from defined benefit to defined contribution, just as they did in the private sector, but it has to be done.