Union busting, attacking the middle class, blaming state employees for budget deficits, disrespecting teachers and other civil “servants,” that’s some pretty heavy stuff. Yet the news is full of such claims. Depending on your perspective I suppose there may be an element of truth in all that. However, once again we are being distracted from the real issue.
The real issue is that the various states have trillions of dollars in unfunded liabilities. Yikes, New Jersey has about $55 billion in unfunded liability for retiree medical benefits. The city of Chicago is reported to have nearly $20 billion in unfunded pension liabilities. How did this happen?
Some will quickly point out that the market crash caused by Wall Street is the culprit and that is certainly a tempting target. Actually, low interest rates increase the liability calculation and as we all know the market has largely recovered. In any case, the market does not explain massive liabilities for retiree benefits other than pensions (medical, dental, prescription and life insurance) because in most cases those promises are not funded.
Promising pensions and other benefits is tricky business because once promised they are hard to change without a lot of pain. In addition, compensation in the form of open-ended promises is difficult to control because of outside forces (think health care costs, interest rates and investment returns). While a 3% raise in pay also affects pension costs and perhaps other benefits such as life insurance and disability benefits, you still can project your future costs for the 3% raise. On the other hand, health benefits have no cap and you have little control over the rate of future increase. The point is that to keep state worker’s pay competitive the available money should have been placed into direct pay rather than generous benefits with their hidden costs and growing liabilities.
Real collective bargaining understands and addresses these issues because in the long-term the promises affect the viability of both parties. Innovative companies address the issues with a long-term strategy and making adjustments that minimize the impact on workers who have come to depend on the promises. In other words avoid a crisis situation. General Motors and the UAW (and bondholders) learned the hard way. Now, the states are in the same boat, but it appears that public employee unions and some politicians still have a lot to learn about the consequences of uncontrollable costly promises.
To say unions have compromised and agreed to givebacks is misleading. Agreeing to start paying something for health care or raising the contribution to say 12% in a world where the norm is closer to 25% is a baby step. Increasing employee contributions to pensions is a short-term diversion when the design of the plan is flawed (think padding the pension with overtime pay in the final years of service) and unsustainable. If the states can’t afford to make required contributions, little has been accomplished.
Collective bargaining requires two parties to compromise from different points of view. One party wants more but is prudent and realistic. The other party wants to give little but understands that improvements are necessary to maintain a competitive environment. Both parties know and understand the cost implications and the trade offs necessary.
This environment does not exist in the public sector. The evidence is abundantly clear. There is no regard for long-term costs. Benefit plans are inefficient, provide disincentives to control costs and frequently exceed by far the value of benefits provided private sector workers. In addition, politicians and bureaucrats fail to identify and fund the ever-growing liabilities. In some case they have diverted funds to other purposes such as tax rebates and intentionally used unrealistic actuarial assumptions.
If you think all this can be changed under the current system of “negotiating” between public employee unions and the politicians they help elect, then you must also believe that Americans have an average BMI of 25 and save aggressively for their retirement.
Related Articles
- N.J.’s unfunded pension liability grew 18 percent in a year (philly.com)
- How much do public workers earn? The facts (msnbc.msn.com)
- Amid crisis, US state workers say: ‘Don’t blame us’ (reuters.com)
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