Public Pensions: Rotting from Within 38 comments
January 14, 2009
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With all the talk about earnings per share and future profits, it's easy to forget that a country's stock market won't experience a bull market if the country spends more than it collects. This is the basic law of business, and it doesn't change just because government is involved. One area that needs a closer look is public pensions.Pension Tsnami is a website about public pensions, and it's definitely worth a look. Here is one recent article on San Jose public pensions, focusing on police officers and firefighters. (The San Jose Mercury article contains the chart posted above.)
Most people respect police officers and other public safety workers, but there is no reason for any public worker to receive more benefits and a higher salary than the average private sector worker. When government employees receive higher salaries and benefits than private sector employees, private citizens end up protecting and serving the government--an odd reversal. This is because private sector taxes and IOUs (bonds) are used to finance government expenditures, and those monies come from the private sector. If there is an imbalance, government will have to run up deficits to keep paying itself, meaning that an imbalance will either devalue the currency (due to the need to print more money to pay for the higher-than-normal benefits) or cause inflation. Thus, whenever the people work to serve the government instead of the other way around, fiscal responsibility will not exist.
There's also the small matter that America was created so private citizens would not have to kowtow to kings or an insulated, domineering government. In short, American government was designed so that it would serve non-government citizens. America's founders would probably disapprove of a political system where people work to serve and pay their government.
Even though the evidence favors treating government workers no better than private workers, it will take a massive paradigm shift to educate the public about the danger of excessive government spending/benefits.
First, television glorifies police officers, D.A.s, and other government workers, while accountants and small businesses don't get any airtime. I still remember my CHiPs costume when I was a kid--but I don't remember seeing any bank teller or taxi driver costumes on Halloween. When the average American watches hours of television, public sector workers have an advantage because they are portrayed as more important than private sector workers--even though it's the private sector workers who are footing the bill.
Second, most of the people teaching our children are government workers. As a result, most students spend eighteen years in a system that has no incentive to educate them about the true costs of excessive government spending and exclusive government benefits. This systemic education failure not only aggrandizes teachers' unions, who have no incentive to reform themselves, but also creates a class divide. Rich people tend to send their children to private schools rather than public schools. In addition, many top government workers, including President-Elect Obama, send their children to private schools. When the children of the middle class and poor spend eighteen years in a different system than the children of the rich, class conflict and envy is virtually guaranteed.
This is why allowing parents to have the option of charter schools is so important. With charter schools, public schools have competition--which usually improves performance--and public schools no longer have a monopoly on education. Most of the public opposes monopolies, knowing they typically produce less innovation and high performance; however, when it comes to charter schools, much of the public is against them, even though they are the easiest way the middle-class and poor can escape the monopoly of public education. When the public views teachers' unions as the Microsofts of education and charter schools as the Googles of education, change will happen.
There are simple ways to resolve the problem of entrenched government. One, require all government workers to have medical and retirement benefits only available to private workers. If a 401(k) is good enough for private sector doctors and lawyers, why do D.A.s and teacher get better retirement benefits in the form of guaranteed pensions? If the average private sector worker doesn't get lifetime medical benefits, why should government workers get such an expensive benefit? (By the way, I bet if we actually did this, all Americans would finally get nationalized healthcare.) When government workers have to use the same services as the public, they have more information about how the average person lives and more of an incentive to fix problems.
Two, institute term limits for all government workers. If we have term limits for the president and other representatives, why allow lifetime jobs for other government workers? A reasonable term limit would be 10 to 15 years. After this time period, a government worker could not go into any other government position and would have to earn his keep in the private sector. The knowledge that a government job is not a lifetime position would incentivize the government worker to improve his/her skills for the inevitable day when s/he applies for a non-taxpayer-subsidized position.
In addition, the turnover would be beneficial to the younger population, who could learn significant job skills through government work and then use those skills in the private sector. It would be like having a government-funded apprenticeship, where future leaders would be trained by experienced government workers to serve the public. Experienced government workers would begin training the new crop of workers from Year 13 to Year 15.
Doing it this way, government would be a non-fossilized place. This moderate turnover (as opposed to almost non-existent turnover) would allow new ideas to flourish in government. It is true we would lose skilled government workers to the private sector, but the key is to train newer workers to ensure a consistent stream of skilled government workers.
In the end, if America wants another bull market, it needs to return to budget surpluses. Demanding that our government not spend more than it collects is one way Americans can help get our country back on track.
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Well done proposal, though.
These bozos will be the next round of beggars in the bailout line. Knowing how fiscally irresponsible DC is, I expect they'll get what they ask for. Taxpayers be damned.
Government at all levels in the US is fiscally irresponsible and far too powerful. Tea party, anyone ?
Only proves how insulated they are from the reality of private workers. I've long advocated zero benefits for gov't workers, just straight pay, equivalent to what they receive now. Then, the true costs are plain to see. Reform would come quicker than a bank bailout.
Great idea to make public sector work time-limited. A training ground, like the military. The service to the public can't be worse than what I faced yesterday when I inquired about a hearing for property tax reduction. The answers to my questions were confusing and contradictory, no double accidentally on purpose.
Put gov't workers in the social security system and that might get somehow fixed also. As things stand, I can hardly wait to see us told to fund the lavish public sector plans even when social security finally collapses. Will that wake up the public?
I've heard it said that reform finally comes when the pain of continuing is greater than that of change. Clearly this pain needs to be great and many changes are going to be forced on us. I'm hoping we're not too far gone to get things right again.
Doesn't everybody's pension grow at 3x to 6x the stated rate of inflation?
Granted, this will likely take years since there is no strong replacement on hand, but if there were any reasonably strong economy/currency at the present moment the dollar would be utterly worthless.
In response to these tough times our public leaders are making us less competitive, implicitly raising taxes at an unprecedented level through borrowing, and robbing the economy of an increasing amount of output through money creation. We are heading down the path of Socialism, crony Capitalism, and Protectionism...not a good combination! it is ultimately the Road to Serfdom.
On Jan 14 11:42 AM Leftfield wrote:
> The above response to this excellent article is absolutely typical
> of gov't worker response to any challenge. When any reform comes
> up, they flood newspapers with "how dare you" responses.
>
> Only proves how insulated they are from the reality of private workers.
> I've long advocated zero benefits for gov't workers, just straight
> pay, equivalent to what they receive now. Then, the true costs are
> plain to see. Reform would come quicker than a bank bailout.
>
> Great idea to make public sector work time-limited. A training ground,
> like the military. The service to the public can't be worse than
> what I faced yesterday when I inquired about a hearing for property
> tax reduction. The answers to my questions were confusing and contradictory,
> no double accidentally on purpose.
>
> Put gov't workers in the social security system and that might get
> somehow fixed also. As things stand, I can hardly wait to see us
> told to fund the lavish public sector plans even when social security
> finally collapses. Will that wake up the public?
>
> I've heard it said that reform finally comes when the pain of continuing
> is greater than that of change. Clearly this pain needs to be great
> and many changes are going to be forced on us. I'm hoping we're
> not too far gone to get things right again.
The good news is, just about every single level of government in the nation is now facing around 25% cutbacks due to loss of tax revenue this year. The fat will be cut out pretty quick, at least some of it.
A year ago I began commenting repeatedly that investors must be paying as much attention to Washington as to there fundamentals or technicals. This largely quanitifies the writers main point, that the private sector should not be serving Washington. Considerations of risks to a business model because of legislation is always a factor, it just shouldn't be 1/2 to 3/4 of the focus of an investor like it is now.
Government policy favored globalization and multinational corporations and of policy allowed massive excess leverage through deregulation. Further, many non-qualified personell were appointed or elected as America felt itself rich and could focus on equality over liberty. Lliberty = reap what you sow and enforced by laws. Sorry, liberty ALWAYS trumps equality in performance. Now we have a nation with a broken justice system on top of the myriad of other problems.
The pain of this downturn will rebalance the inequalities in public vs. private pensions. Sure, local state and federal benefits won't see much cuts at first, but when government creates downward mobility situations for the business class (noticeably small business, 50% of all new job creation in the last decade) the response is a lot less production and tax revenue.
Mr. Rafat, you are quite a thinker! I built a site for this very kind of dialogue (current economic mess all points back to politics).
On Jan 14 12:27 PM notsosmart wrote:
> the govt workers got to this point because the citizens allowed it.more
> concerned with sports,etc.than the fleecing thats taken place over
> many years.impossible to change since you get silly remarks like
> above to call an accountant if you get mugged.too late to change.sadly.
On Jan 14 10:49 AM bigmoney wrote:
> years ago, my parents pushed me to toward work in the private sector.
> But looking back on it, the plush jobs are in government. Even public
> school teachers have a good deal. They whine and complain about salary,
> but they work 9 months a year, and can spend most or all of their
> income knowing they will get a taxpayer funded pension and health
> care. Meanwhile, I often have to work 60 hour weeks, which includes
> 24x7 pager support, suffer job insecurity, competition from Asian
> immigrants, and I have to carve out a retirement plan from my paycheck.
> And when its all said and done, there's no health care, which means
> no retiring before Medicare kicks in at 65.
I'll agree that government retirement programs perhaps are more lavish than the private sector programs that remain, or 401(k)s. In recent years, federal employees haven't had access, as I understand it, to the old returement system and have had to pay at least into medicare.
To answer "bigmoney" about health care, reasonable health care is available to those under 65. I get mine through AARP, since I'm over 50.
Somebody wrote: "we are headed down the path of socialism, crony capitalism, and protectionism....." In my view, Bush/Cheney was all about crony capitalism (energy leasing practices via V-P Cheney's secret energy task force in 2001, no-bid contracts in Iraq for Halliburton, etc.). Laws like the Patriot Act were all about socialism. The US steel industry is now advocating for use only of steel made in this country. Price of sugar has been kept artificially high for decades in the interests of US sugar producers. There's two examples of protectionism. Looks like we're already there on all three counts.
Crony capitalism has been a way of life since at least the Bush I years.
The difference is that in Bush I, they were very careful to cover their tracks with plausible excuses. Clinton tried to cover it up, got caught, and spent a lot of time with further misdirections and coverups.
Since the Shrub (GW) took office it's become entirely blatant. Claims of similar cronyism today are simply ignored without any hue or cry from the 'watchdog' media or notice by the public.
Maybe they actually believe that businessman instead of bureaucrats can turn illegitimate uses of government power into legitimate ones. Does a different rider on the bull in a china shop make that much difference?
"(By the way, I bet if we actually did this, all Americans would finally get nationalized healthcare.)"
Dude is an idiot. My dad works in state government, and being "rank and file" (as opposed to one of the governors cronies or high-level "administrator", he always got paid very low compared to private sector -- the ONLY thing that made it worthwhile staying in the job was the bennies -- he had good healthcare, and that was through local HMO group plans...the rates were decent because it was a large group plan, not because public workers were ripping off the taxpayers. Do your research, people. Government IS too big, by far. But the budget deficits are not due to rank-and-file government workers being overpaid. Higher level ones certainly are. But not rank-and-file. The problem is that we have far too many government agencies to begin with. The problem is our system of confiscatory taxation to pay for those agencies. The problem is entitlement government -- Social Security, Medicare, housing subsidies, etc. The author rails against government pension plans, then proposes if we put government workers on Social Security, that would fix SS. I HAVE NEVER READ A STUPIDER THING on this site!!! They already ARE on SS. Like everyone else in the workforce. SS is the PROBLEM, not the solution. Pension payouts are more closely tied to what the individual puts in...especially given that most employers have moved to "defined contribution" plans instead of "defined benefit" plans. We just need to go farther with that. And use that same principle to phase out SS, by gradually making it a personal account, and optional.
I sure hope noone falls for this guy's baloney.
Even when constrained, you continue to desist from throwing others under the train.
Forbearance and restraint seem to emanate from your writing style, I can only wish for the same.
Having seen the lengths you will go to to explain your positions without lapsing into bouts of dementia, I have to applaud you.
Mind you, I may disagree just to get riposte or agree with another to get another view from you, but your comments are always worth reading, however long they may sometimes be.
May the road always rise to meet your feet.