The coming public pension nightmare

Rick Moran
With all the fiscal problems created by Barack Obama, the public pension crisis cannot be laid at his doorstep.

That's because public unions - police, firefighters, teachers, state and local workers, and transit employees - have been gouging cities and states for years, sweetening their pensions at taxpayer expense until a nightmare is now on the horizon; the inability of cities and states to pay for these diamond-studded pension plans.

And that will eventually mean a taxpayer bailout to end all taxpayer bailouts.

Forget rising federal taxes. The rate of increase that will be necessary to pay for these pensions in the near future will necessitate massive increases in taxes along with massive borrowing. There's just no way around it - unless the union's current defined benefit plans can be renegotiated to reflect reality.

That's not likely to happen. What makes these plans so enormously expensive is the early retirement feature and the number of years one must work to be vested, or eligible for payments. Some of these plans are so generous that a retiring public worker at age 55, after having worked only 10 years (or less) in the system, is eligible for 75% or more of their highest salary - for life. Add to that the practice of ginning up salary for workers who will retire in a couple of years and what should be public service becomes public rape of the taxpayer.

Minnesota is in deep trouble with their public pensions as Fred Zimmerman writing in the Star-Tribune reports:

Minnesota sidestepped the pension crisis during the past legislative session. But a massive infusion of funds is being proposed for the next session. The added costs will make balancing the state's budget even more difficult.

Several water-muddying mechanisms have been devised by public officials to reduce anxiety and further delay the day of reckoning. Insiders might describe it as carefully formulating actuarial assumptions about future revenues and costs. Others might describe it as cooking the books.

State administrators appear reticent to own up to an obvious but unrecognized problem requiring billions of dollars to correct. Retiree organizations seem reluctant to call the public's attention to the true cost of the benefits they have been receiving. Courts seem reluctant to interpret the constitutional requirement of a "balanced budget" in accordance with proper accounting conventions.

Three responses to the problem of unfunded public pensions seem possible: First, retirement ages could be increased to the age of 70 or so, and benefits could be reduced to levels more common in the rest of the economy.

Second, taxes could be increased to cover the current shortfalls. However, any proposed tax increase will seed its own conflict -- a sort of "prisoner's dilemma." Who should pay the tax? Nonpublic employees who are working into their 70s who did not get the money? Or retirees who did get the money? Or current public workers who may never get the money? Widespread satisfaction is unlikely.

A third possible response seems imprudent, but more likely: Kick the can down the road again. Ignore arithmetic and pretend the problem does not exist -- a technique now employed in several states.

Some cities in California have already bankrupted themselves trying to pay off public employee pensions. And with the economy still in the dumps, the problems facing states and large cities is only going to get worse.

Government is legally obligated to pay these huge benefits to retirees. Any attempt to change them via legislation will be challenged in the courts - probably successfully. What must occur is a sea change in opinion of both taxpayers and beneficiaries. Nobody is begrudging these employees a decent pension. But bankrupting the very government they loyally served should not be an option.

Hat Tip: Ed Lasky



With all the fiscal problems created by Barack Obama, the public pension crisis cannot be laid at his doorstep.

That's because public unions - police, firefighters, teachers, state and local workers, and transit employees - have been gouging cities and states for years, sweetening their pensions at taxpayer expense until a nightmare is now on the horizon; the inability of cities and states to pay for these diamond-studded pension plans.

And that will eventually mean a taxpayer bailout to end all taxpayer bailouts.

Forget rising federal taxes. The rate of increase that will be necessary to pay for these pensions in the near future will necessitate massive increases in taxes along with massive borrowing. There's just no way around it - unless the union's current defined benefit plans can be renegotiated to reflect reality.

That's not likely to happen. What makes these plans so enormously expensive is the early retirement feature and the number of years one must work to be vested, or eligible for payments. Some of these plans are so generous that a retiring public worker at age 55, after having worked only 10 years (or less) in the system, is eligible for 75% or more of their highest salary - for life. Add to that the practice of ginning up salary for workers who will retire in a couple of years and what should be public service becomes public rape of the taxpayer.

Minnesota is in deep trouble with their public pensions as Fred Zimmerman writing in the Star-Tribune reports:

Minnesota sidestepped the pension crisis during the past legislative session. But a massive infusion of funds is being proposed for the next session. The added costs will make balancing the state's budget even more difficult.

Several water-muddying mechanisms have been devised by public officials to reduce anxiety and further delay the day of reckoning. Insiders might describe it as carefully formulating actuarial assumptions about future revenues and costs. Others might describe it as cooking the books.

State administrators appear reticent to own up to an obvious but unrecognized problem requiring billions of dollars to correct. Retiree organizations seem reluctant to call the public's attention to the true cost of the benefits they have been receiving. Courts seem reluctant to interpret the constitutional requirement of a "balanced budget" in accordance with proper accounting conventions.

Three responses to the problem of unfunded public pensions seem possible: First, retirement ages could be increased to the age of 70 or so, and benefits could be reduced to levels more common in the rest of the economy.

Second, taxes could be increased to cover the current shortfalls. However, any proposed tax increase will seed its own conflict -- a sort of "prisoner's dilemma." Who should pay the tax? Nonpublic employees who are working into their 70s who did not get the money? Or retirees who did get the money? Or current public workers who may never get the money? Widespread satisfaction is unlikely.

A third possible response seems imprudent, but more likely: Kick the can down the road again. Ignore arithmetic and pretend the problem does not exist -- a technique now employed in several states.

Some cities in California have already bankrupted themselves trying to pay off public employee pensions. And with the economy still in the dumps, the problems facing states and large cities is only going to get worse.

Government is legally obligated to pay these huge benefits to retirees. Any attempt to change them via legislation will be challenged in the courts - probably successfully. What must occur is a sea change in opinion of both taxpayers and beneficiaries. Nobody is begrudging these employees a decent pension. But bankrupting the very government they loyally served should not be an option.

Hat Tip: Ed Lasky