Tuesday, August 16, 2022

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Class Warfare

In my recent op-ed on the structural flaws of public pension systems, I argued that politicians, union heads and bureaucrats use their positions to play taxpayers against public employees for political and financial gain. Monday, the New Jersey Star Ledger reported on a growing backlash against public employee benefits:

In internet postings and on talk-radio shows, government workers are being called “greedy” and “bloodsuckers.” Commenting on the teachers union, one writer called its members “the worst human beings on the face of the planet.” Criticizing the police, another wrote, “The typical criminal could never steal what these cops are walking out the front door with.”

As New Jersey’s unemployment hovers at 10 percent and 401(k)s are dented by stock-market losses, retired public workers find themselves on the receiving end of “pension envy.”

“I understand that I retired with a good pension and the taxpayer contributed to it,” said Tevlin, who kicked in 8.5 percent of his salary toward his pension, which is about $4,000 a month. In his mind it was a fair bargain: In exchange, the public received reliable emergency services. “I don’t apologize to anybody,” he said. “I did a dangerous job.”

This kind of infighting doesn’t serve anyone’s interests. It highlights the problem inherent in the defined-benefit pension system. Theoretically, public employees work for the taxpayers, providing public goods like public education, safety, and emergency services. In reality, taxpayers have little if any direct control over public employees. Those employees are hired by, paid by, and responsible to either public sector unions or directly to bureaucracies. Those middlemen finance their outfits with taxpayer money. Playing one group against the other is an easy way to remain in power.

A 2008 study by the Hudson Institute analyzed collectively negotiated (i.e. union) pension plans versus non-union plans. The results are staggering. These numbers encompass both public and private plans:

- Privately negotiated plans are 98% funded. Union plans are only at 88%.

- For large plans, 37% of non-union plans are fully funded, versus only 19% of union plans.

- For large plans, 2% of non-union plans are in critical financial situations, while 11% of union plans are in crisis mode.

In short, the Hudson study shows that union negotiated plans are significantly worse off than private plans. Similarly, Monday Barron’s reported that the public pension crisis is far worse than the Pew Center study I referenced:

More debt defaults and bankruptcy filings probably lie ahead, unsettling the $2.7 trillion municipal-bond market. The possibility of taxpayer revolts and likely insolvencies has shaken some investors’ confidence in general-obligation bonds — those backed by the “full faith and credit” of the states or localities. Once the gold standard for munis, GOs are under a cloud in financially troubled areas.

The size of the legacy-pension hole is a matter of debate. The Pew report puts it at $452 billion. But the survey captured only about 85% of the universe and relied mostly on midyear 2008 numbers, missing much of the impact of the vicious bear market of 2008 and early 2009. That lopped about $1 trillion from public pension-fund asset values, driving down their total holdings to around $2.7 trillion.

When you can promise public employees lucrative salaries and benefits, while paying for it all with someone else’s money, it’s easy to imagine running up such a ludicrous tab.

No one, of course, would dispute that public servants deserve adequate retirements, particularly the 25% to 30% that lack Social Security coverage. But the old saw that rich retirement packages are a necessary inducement to attract good employees to public payrolls because of below-average pay scales no longer is true.

According to the latest compensation survey by the Bureau of Labor Statistics, the average state and local employee outearns his counterpart in the private economy with an hourly wage of $26.11, versus $19.41. That’s before benefits (pensions, health care, paid vacations and sick days and leaves) drive the disparity even higher, to $39.60 an hour for public employees and $27.42 for private workers.

In public pensions, we allow politicians to play us against real servants of public health and safety. The system needs to change.