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Are State Pensions the Real Problem?
Ezra Klein of the Washington Post asks, How much can we blame on state pensions?:
Wondering why New Jersey isn't finishing its much-needed commuter tunnel to New York? Easy, says
David Brooks. Blame public employees, their pensions and their pay.
"States across the nation will be paralyzed for the rest of our lives
because they face unfunded pension obligations," he writes.
State pension systems are a problem. But they're not the problem right now.
And they're certainly not what's standing between New Jersey and its
tunnel. After all, Christie didn't fund the pension system this year. He
simply skipped
the $3.1 billion payment, saying he wouldn’t add money to a "broken"
system. If I didn't buy lunch today, you can hardly blame the cost of my
lunch for the fact that I don't have bus fare.
Brooks's column
doesn't do much to put the pension obligations of the states in
context, so we'll do it here. Just today, Alicia H. Munnell,
Jean-Pierre Aubry and Laura Quinby released a paper
(pdf) tallying up the pension problem. "Public plans are substantially
underfunded," they conclude, but "in the aggregate, they currently
account for only 3.8 percent of state and local spending." Roll that
around for a minute. Pension obligations currently account for 3.8
percent of the average state's spending. That's not where the current
crisis is coming from. If you want to see where the state fiscal crisis
is coming from, turn to this graph from the Milken Institute (click on image to enlarge):
"The
problem in this moment," says Betsy Zeidman, director of the Center
for Emerging Domestic Markets at the Milken Institute, "is revenue."
The word "revenue," incidentally, doesn't appear in Brooks's column.
But
that's what changed. In the months before the financial crisis, in
fact, states had built up record rainy-day funds and were starting
infrastructure projects. Then Wall Street collapsed, and so too did the
revenue states got from taxing property, incomes and sales. At the same
time, the need to spend on social services went up rather than down.
The result? A terrible strain on state budgets. But not one you can
blame public employees for.
If you
look forward 10 years, of course, pensions become a much bigger
problem. But not the biggest one. "Assuming 30-year amortization
beginning in 2014, [pensions] would rise to only 5.0 percent [of total
state spending] and, even assuming a 5 percent discount rate, to only
9.1 percent." Just like for the federal government, it's health-care
spending, not pensions, which poses the greatest long-term threat to the
states (click on image to enlarge):
Brooks
also attacks public-sector employees from another angle: "Nationally,
state and local workers earn on average $14 more per hour in wages and
benefits than their private sector counterparts," he writes. This
relies on a loose definition of the word "counterpart." It doesn't mean
"compared to the workers like them." It means "compared to the average
worker."
If you compare workers
(pdf) of like education, experience, etc., you'll find that
blue-collar workers in the public sector do a bit better than
blue-collar workers in the private sector, but white-collar workers do a
lot worse. The calculations that compare average wages neglect to
mention that public-sector jobs tend to be white-collar positions,
while most positions in the private sector aren't. More than half of
all public employees have college degrees, compared to about 35 percent
of private-sector employees. What's that? You want a table? (click on
image to enlarge):
This
shouldn't be too much of a surprise. Ever talked to a lawyer who works
for the government, or a teacher? Have they ever told you they signed
up with the public sector because the money is so good? Meanwhile,
would that we'd offered more money, and attracted more talent, to the
regulatory agencies in the run-up to the crisis. That investment would
have paid for itself a thousand times over.Then Brooks takes
one final turn: "This situation, if you’ll forgive me for saying so,
has been the Democratic Party’s epic failure," he says. He's forgiven,
but he's also, well, wrong. As any expert can tell you, most every
state is facing these problems over the next few decades. Are we really
to believe that Democrats are dominant in every state legislature in
the country?
Moreover, state budget problems have a spending
side and a revenue side. Democrats (and some Republicans) and the
unions have increased spending on public employees. But Republicans
(and some Democrats) and business interests have passed massive
unfunded tax cuts that turned pension programs into ticking time bombs.
See California for more on this play. There's plenty of blame to go
around.
There are real challenges
facing states in the coming years. But these are serious, complex
challenges, not a simple morality play in which we just need to get
tough with state employees and all will be well. In the short-term, the
problems facing states -- the problems that are forcing them to stop
construction of ongoing projects -- are not driven by pensions or
public employees, but by the financial crisis.
The challenges
facing them later are not nearly so simple as greedy state employees or
runaway pension spending. Health care is a major player here, as it is
everywhere else. And while states are facing serious pension problems
because they still offer defined-benefit pensions, we're also going to
see the retirement of millions of private-sector workers who don't have
defined-benefit pensions, and either haven't contributed enough to
their 401(k)s or saw their wealth wiped out in the recent turmoil.
We're facing a pension crisis in the public sector, but we're also
looking at a retirement crisis in the private sector.
These
problems aren't going to be easy to fix, and there's going to be plenty
of pain to go around -- including for unions. But before we can start
working on solutions, we need to describe the challenges clearly.
I
agree with the author. Put in perspective, underfunded state pensions
are not the driving force behind ever widening state budget deficits.
Having said this, in an era of austerity, public pensions will not
escape deep cuts, that much I can guarantee you.
And then
there is the potential muni meltdown. Municipal pensions face a $500
billion deficit, and states are already $3 trillion in the hole, according to a new study by the Kellogg School of Management. Below, Alexandra Lebenthal, of Lebenthal & Co. and Ben Thompson of Samson Capital discuss the municipal bond market.
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Leo, thanks for adding facts to the analysis....here in US state pensions for police/prison guards in Cali are way way way excessive, even if the average public worker compensation including pensions were not that badly out of whack the public servants getting rich being cops, retiring at 50, making more the 100 percent of their working salaries (via spiking of final years pay) for the rest of thier life is very wrong regardless of its fiscal significance.
Seeing how the pension costs figure into big picture is good perspective for fiscal policy...but some of these pensions are freaking greedy and ruin it for many other public employees whose lifetime compensation of salary and pensions were likely fairly in line with private employees.
Leo, I'm sure you can tell me what a say, privately employed security guard or civil engineer would have to save in their 401k to insure same pension benefits as low level cop or cal-trans staff engineer would get.
Really, think about it, what would a private employee have to in their 401k to get there working salary from age 50, 55 until ther natural death at whatever average lifetime is. Really, in todays interest rate environment that would have to millions of dollars, to yield 30+ years of $70-100k salary, no? That is how whacked these cases are.
And I'm not even talking health care.
California is going to be crushed by its pensions. The economy is not recovering and municipalities revenues continue to decline. We are between the rock and a hard place. There is no way a younger generation will pay for the outrageous pensions.
+1
I don't know how many folks here have ever checked out a magazine called The Washington Monthly. It is or at least used to be (I don't think I've read a copy in several months) edited by a guy named Charles Peters. Peters is basically a liberal but the rare sort that people of other perspectives can respect. He's honest enough to allow statements against interest, to admit unflattering truths about how government works.
Some years ago, The Washington Monthly printed an incredible article. They asked federal government workers what percentage of their co-workers could be eliminated from their office or agency without impairing its functioning. Remember, this was a magazine run by a liberal asking this question of federal workers, a group not noted for their libertarian biases. The consensus of federal employees was that 33% of the desks or cubicles around them could go empty the next day without the public noticing a difference in functioning.
Now, Peters, being the incredibly rare sort of liberal that he is, suggested that budgets should be dramatically pared so that the money could then be put toward other programs which he favored. Fair enough, even to a libertarian like me. Peters was being completely honest about the superfluous 33% but wanted to do something with the money saved that I wouldn't support.
I would suggest to you, Leo, that the functioning of state gov't is very much like the functioning of the federal gov't and that the biggest problem is not yet the state pensions but the 33%.
"...Republicans ... have passed massive unfunded tax cuts that turned pension programs into ticking time bombs. See California for more on this play"
I live in California and have since the mid-70s.
When did Repubs ever have the votes to do this? I think it is clearly Dems who have pushed gov't unions and expanded gov't employment and passed expanded gov't pay and benefits.
You can argue this is not a problem (I think you are arguing that) but how can you saying it is not the case?
I have a slightly nuanced take on that tunnel.
I don't think there are going to nearly as many bankers commuting from NJ to Manhattan. So who is going to fill that tunnel besides dudes going to motels in NJ?
Yes I can if you had lunch yesterday.
10% of the budget for pensions would be outrageous, it should be closer to 12% of your payroll.
No "one" thing is ever the whole problem. However, if you tell me pensions that allow retirements while in your 50's, have no significant employee contributions and allow some to retire at full or near full income are no big deal then you either work for the unions or are an idiot. Entitlements, social programs, bridges to nowhere, fraud, too many government employees, punishing tax rates, regulatory strangulation, and shrinking revenues are all problems. However, they are problems with one source: An ever larger all devouring government at all levels from cities to the Feds. Freedom is so much cheaper than a redistributive centrally planned state. More prosperous, more fun, and more moral.
not for stupid, lazy folks.
You have two choices:
1) Ride it into the dirt and hope the currency collapse happens after you are well into your retirement. After that moment you will get close to zero.
2) Admit the fraud of all defined benefit retirement plans. Pay folks out on their net contributions, plus proven returns. (Yeah, I know, that that 50k is a lot less than the million and a half you thought you were gonna get).
Obviously, number two is not going to happen...so if I were working in one of these ponzi scemes, I would quit contributing to Madoff, I mean my retirement, and divert that money to something that will benefit from the "into the dirt" scenario, stated in item number one.
You have a point, but I think the author of the article needs to also look into the Muni Bonds. I know he commented about it and said things about the muni pensions. But what I didn't know and found out a few year ago is that almost all states use muni's now for not only large expensive projects, but to fund the govt. yearly. What they do is roll it over and over and over again and use optomistic projections to help give their bonds essentially good ratings (also hint around and allow the perception to be out there that the Federal govt. will bail them out). So if tax revenue is going down that means there isn't enough money to service the debt that is out there, even local govt. has been doing this. The federal govt. is more worried about the munis defaulting, because if they do the only thing left is Treasuries and investors will start to wonder about them also. And those payments that are supposed to go to the pensions that states put off via new mandate by the state senate, get put back in the kitty to be used with the other money. Their reasoning is that well put off this 3.5 billion this year and pay 4.5 billion 3 years from now because of the optomistic forcasting of their tax revenue and budget. The same thing they do with the muni bonds.
The big reason why the Fed/Whitehouse isn't running to the rescue of states and their budgets are two fold. The minor one is that it would allow bad budgeting on the state itself. If the state knows that every 2 to 4 years they will get bailed out, they won't show fiscal responsibility. And the major one is a combination of inflation and being swamped by to many states (essentially all of them). If Obama bails out say Michigan or even California, all the states using their representatives in congress and the senate will want a bailout to (even the ones that aren't that bad off which is only a few). They will hold up that bailout for their states also and then we have a QE for the states to the tune of at least 1 trillion dollars (for that year alone). Then what happens is that while we have stealth inflation (smaller containers or just in certain items like food and fuel), we will have breakout inflation because the money that went to the states won't be put back into the Fed to buy treasuries and just sit. It will hit the street and we will see inflation rising fast.
What I see happening is that pensions will be cut and cut severely for much of the state employees, except for police and firefighters. What will happen after that is those two (Police and firefighters), will get the screws turned on them. Meaning they will have to do more and have less job security (making a two tier retirement program for new and old hire police). Also my bet is that they will pay the chief's and capt's of these organizations good along with retirement, but they will have to be the hatchet men to manipulate the system against their own people. And it should work, because as long as you pay the big dogs big money they little ones will strive for the position and the big ones will protect for that position.
great contribution, Buck. thank you.
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A real, active duplicated board for your fun and games.
Leo you make me "shart" my shorts with every article you write
Name your poison - austerity or the like. Or attempt to do what Sarko proposes, raise the retirement age. Pay in longer and replenish the supply, Oh Wait! That would mean that someone would have to be responsible for inflow vs. outflow and to seek stable returns on investments without dipping in a little too often for the general budget supplement.