Published in The News Tribune, April 15, 2011
Paying public employee pensions is costly, and will become more so. So we
better learn the right lesson.
In this state, two public pension programs are running out of money. Unless
it changes current contracts, the state will have to significantly dip into
the general fund to meet its obligations.
The recent House budget addresses this problem by reducing future payouts to
retired workers. Yet even if approved, the changes still leave the two
programs billions of dollars short over the coming years. As most everyone knows, the difficulty of paying for state employees’ pensions is not at all unique to our state. If it¹s any consolation, many state pension programs are in worse shape than ours.
Collectively, states will need to come up with trillions of dollars over the
next few decades to meet their pension commitments.
This knowledge is part of what is whipping up anti-union sentiment around
the nation. In the view of many, the overly generous compensation packages
unions have wrested from politicians are partly behind state budget
But union power is not an important cause of states¹ budget woes. This is
apparent when you do a simple comparison of states where public employees
are by and large unionized with states where they are not. What you find is
that states have made pretty similar pension commitments to their employees,
whether unionized or not. With fewer than 15 percent of its public employees covered by a collective bargaining agreement, the state of Georgia provides its employees with one of the nation’s most generous retirement packages.
So the lesson to be drawn is not about the destructive power of unions.
Rather, it is about the need to draw limits around the commitments state
governments take on.
As structured, public pensions at least the ones currently in trouble
are a form of insurance. In exchange for set contributions, retirees get a
guaranteed monthly income from the time they hit retirement age until the
end of their life.
\This sort of a pension, called a defined benefit pension, takes much of the
uncertainty out of future planning. It is in this sense like insurance:
Workers gain protection from income uncertainty during their retirement
years for known payments now.
Of course it¹s unknown how long retirees will live or how much return they
will gain from their investments. However, in defined benefit pensions,
this uncertainty is shifted from individuals to state governments.
Unlike the federal government, state governments are not well positioned to
take on this risk. The reasons for this are now obvious: Retirees are living
longer, so pension programs pay out more, and investment returns are down.
Meeting these obligations means cutting into funds once allocated to health
care and education.
There are other reasons for shortfalls in pension programs having to do with
deceptive accounting practices. But the main point is that state governments
shouldn¹t take on the uncertainty associated with defined benefit pensions
because they leave states vulnerable to the exact situation in which we now
Protecting citizens from some forms of financial uncertainty is exactly what
we should look to our federal government to do; Social Security is the best
example of a program that does just that. But state governments are ill
equipped to take on this task certainly not on the scale that they have.
It is and will be a hard lesson for states to learn. But the wrong lesson
is learned if the problem is one we attribute to unions.