Why you can’t afford government worker pensions and benefits

The majority of Americans never had a pension in retirement and even among large employers, the lifetime annuity pension is a dinosaur.  That is not a good thing as we are learning in this economy.  On the other hand, there is still one bastion of the traditional pension, public employees.  These workers have two other things that are becoming unique: generous, frequently free health benefits, and union representation. The combination of government employment and unions is costly, powerful and potentially dangerous because union influence over politicians in the public sector means less objectivity in making decisions about employment matters, especially pensions and other benefits.   Public sector unions heavily influence government, especially state government, more so than voters.  Consider this from a recent Wall Street Journal Article:

“The political scientists Fred Siegel and Dan DiSalvo recently wrote in the Weekly Standard about the 2006 example of former New Jersey Governor Jon Corzine shouting to a rally of 10,000 public workers that “We will fight for a fair contract.” Mr. Corzine was supposed to be on the other side of the bargaining table representing taxpayers, not labor.”

In essence, states find it difficult to act like employers approaching their worker’s benefits more like a welfare agency, which does not bode well for taxpayers.  For example New Jersey employs temporary workers during tax season and, during the rest of the year these workers collect unemployment, but keep their free health insurance. No private employer could afford such generosity and neither can New Jersey’s taxpayers.

Taxpayers are generally unaware of the major impact government worker benefits have on their local taxes.

In California many workers can retire at age 50 with a pension that equals 90% of their final year’s pay. The pensions for these (and all other retirees) increase each year with inflation and are guaranteed by taxpayers forever—regardless of what happens in the economy or whether the state’s pensions funds have been fully funded (which they haven’t been).  A worker who retires at age 50 may collect a pension for longer than they were employed. In Ohio, a worker with 35 years of service retires with about 91% of pay.  In addition, benefits in Ohio rise 3% a year after retirement.  In fact, a cost of living adjustment is standard for public employee pensions, but is rare in the private sector.  Such a provision adds substantial cost to the plan.  Politicians appear unable to be objective in their dealings with government workers but rather are driven by selling themselves regardless of the consequences. 

When the formula called for no increase in Social Security benefits for 2010, the immediate political reaction was to either waive the rule or provide yet another new benefit to help offset the lack of a COLA.  More on this topic in the Federal Times . Multiply this tendency by a factor of fifty for each state and you get a sense for the magnitude of the problem.

According to an Employee Benefit Research Institute report (April 2009), of the 50 states, the public pension plans of 20 states had less than 80 percent funding levels in either 2006 or 2007 (before the stock market collapse). The public plans of 19 states had less than 80 percent funding in both years.  In addition, public plans typically measure liabilities much more aggressively than the private sector, assuming returns of 8% to 9% when discounting promised benefits.  Also, from the same report consider this: “Public plan sponsors have not always contributed the amounts to pension plans that their actuaries recommended….public plan sponsors faced with a sharp decline in funding status may eventually have to resort to higher taxes or other public revenue to cover public pension obligations.”

Unlike private pensions, public employees contribute toward their future pension. Therefore one could assume workers are paying for the full cost of these benefits.  However, it is not true in the public sector.  For example, an average private pension is funded at a cost of about 6% of payroll and a good pension at about 8%.  In the public sector workers contribute from around 5% of their pay to as high as 18% (which includes some cost for retiree medical coverage).  However, pension benefits are so generous that the employer also contributes an additional amount often equal to or greater than what the worker pays.  In other words, a public workers pension costs twice or more that of a private sector pension plan. 

Moreover, who pays this cost?  Taxpayers of course.  Yet, the unions seem to be detached from this reality.  Their case is made based on the higher calling of government work and lower pay.  The issue of lower pay simply is not correct and even if it were accurate, it would be far more efficient to raise pay levels than to provide generous retirement and medical benefits where costs are more difficult to control, create an ongoing obligation and rise faster than wages. Public employee unions are doing to government what the UAW did to General Motors and like GM, neither management nor shareholders (taxpayers) are minding the store. 

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I don’t care who pays for the pie, I want my slice (Ala mode)

Government workers should have a fair (but affordable) pension and other benefits, but the states go beyond that and add provisions that are unnecessary to that goal.  For example, in New Jersey (and other states) plan participants can borrow from the pension trust at 4% interest while the fund assumes at rate of return about twice that percentage thus assuring a funding loss for each loan granted.  In Ohio, a worker can select a survivor annuity, but if the beneficiary predeceases the retiree at any time, the pension is reinstated to the single life annuity amount.  Liberal early retirement and disability pension provisions and generous benefit formulas, including automatic cost of living adjustments, add to these costs. 

Beyond pensions, government workers especially at the state level have generous and costly health benefits.  The unions also drive such benefits.  The Employee Benefit Research Institute reports that: “Premiums for plans with at least some union workers were 4 percent higher than the premiums for plans with no union workers.” This is even more pronounced when the public employee unions are isolated, but the problem goes much further.  According to an editorial in the February 4, 2010 New York Times, health insurance premiums for retired military personnel have not been raised in 15 years.  Today an annual family premium is $460. Many active employees in the private sector pay that amount or near it as their portion of a monthly premium.  

The Mackinac Center  recently surveyed all 551 conventional (Michigan) school districts about their employer-provided health insurance costs in 2008-2009. The results were eye-opening. The cost of the average family plan for teachers was 39 percent higher than the statewide average for the same type of plan. Teachers on average contributed 4 percent to their own health care premiums, compared to the state average contribution of 22 percent. In more than 300 school district plans, teachers did not contribute anything to their own premium costs. Employees who contribute little or nothing toward their benefits care little or nothing about the true cost of their coverage.  That leaves no one else to care but taxpayers, but most have not made the connection between employee costs and taxes. 

New Jersey recently passed a law requiring government workers at all levels to pay 1.5% of their pay toward health benefits.  For someone making $35,000 per year that equals $43.75 per month, for a worker earning $80,000 it is $ 100.00 per month.  This is progress but insignificant progress.  Compare these premiums with a union worker in one Fortune 500 company in New Jersey.  Newly hired workers pay from a low of $303.00 per month for family coverage to a high of $489.00 depending on the plan selected by the employee. 

States provide not only generous benefits at low or no cost sharing, they enact provisions that make no sense in the real world. For example, in New Jersey if a couple are both covered separately by the state health benefits plan, they can coordinate benefits and receive 100% reimbursement for their medical expenses even though one or both may pay nothing for the coverage.  In addition, most retirees in NJ pay nothing for their medical coverage and the State reimburses them for their Medicare Part B premium.  New Jersey and other states have hundreds of billions of dollars in unfunded liability for the health benefits promised to retirees.  In the private sector, such liabilities have caused the reduction and elimination of retiree benefits, not so in the public sector. 

A new study from the Pew Center on the States provides confirmation of the problems faced by the states largely because  irresponsible management of budgets, union negotiations, employee relations and employee benefit programs. 

Does all this matter?  Of course it does. Greece offers us an example of where we are headed. The following is from the Sunday, February 7, 2010 New York Times. 

DIMITRIS DAMIANIDIS is a high school teacher and a strong supporter of Greece’s socialist government. But that won’t deter him from going on strike with hundreds of thousands of other public sector workers next week to fight for the 28,000-euro pension that he expects to receive annually after he turns 60 next year.

“Why should I as a worker pay for the errors in policies?” he asked, in response to reports that the embattled Greek state will cut his pay and, by extension, retirement benefits. “The worker can’t be the scapegoat. So we have to defend ourselves.”

As Mr. Damianidis and others on the state payroll prepare to stop work on Wednesday, fear is building that the country’s new government may lack the nerve to cut public wages and pension payments, which make up 51 percent of its budget

To me this presents an interesting and somewhat incomprehensible attitude in that this person sees no connection between his entitlement and the country’s ability to pay for it.  This may be an extreme example, but it is little different from the attitude of many unions representing state workers.  Meanwhile the citizens of those states stress under the burden of income and property taxes and declining services.  

Promises are interesting things, people expect you to keep them, regardless of the consequences to anyone else. Somebody should remind our politicians of that.

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