Public Employee Pensions are Going the Way of the Model T

Readers have had quite a bit to say to me about my post on public employee pensions. I have a few thoughts now that readers have weighed in, and then I'll drop the subject.

It seems to me that private defined benefit pensions are going the way of the Model T, soon to be extinct if they aren't already. Defined benefits were easy to offer when global demand outstripped global supply and U.S. companies were the preferred provider of just about everything. A reliable earnings stream plus a market return on the principal were a nice combination. But as more of the globe seeks Western living standards (how did Gandhi respond when asked about his opinion of Western Civilization: "I think it would be a good idea."), there's always someone somewhere who'll sell for less. 

Easy capital flows, the internet commodotizing any business that can be commodotized, and increased global competition conspire to make earnings streams for any one company much less predictable than it was for, say, GM in 1957. That any one company can realistically be expected to provide retirement benefits for its workforce (one that is, I'm guessing, at least an order of magnitude more fluid today than just 20 years ago) into perpetuity is, well, just not realistic. It might be nice, it might even be desirable, but it's very unrealistic.

Hence, the defined contribution plan. Public pensions are a different animal. They don't have an earnings stream to rely on, though they do have taxes. And therein, as I see it, is the source of the conflict. Police, fire, teachers and so forth provide a very needed service and they're entitled to a dignified retirement. But as long as there's a political infrastructure on top of public pension management, the more likely the investment and distribution decisions will be heavily influenced by political needs. Politicians like to get elected and stay elected. And with public pensions, just as with most things a government spends money on, benefits are concentrated while costs are diffused. As such, politicians have every incentive to spend money in a way that's politically useful. Democracy sure is a hassle, isn't it?

Comments

[nitroae23:]

Pension plans are a plague every municipal planner has to deal with,the quicker they die,the better.Big 3/UAW share equal parts of blame for the pile of dog poopies our auto industry is in,Big 3 for buying labor peace at all cost,UAW for slaying the fatted calf,P.S. In an earlier time,I was a union steward/organizer,but NEVER a syncophant!

2008 Mar 06 10:43 PM

[User 48501:]

these will break the taxpayers backs---------soon they will be forced to sell muni bonds to pay these costs.

2008 Mar 07 12:19 PM

[richandmer:]

I live in Oregon and I find it very unfair that state and county government are providing a pension program much better than the average citizen receives. In fact, I have heard that many gov employees receive more in pension than they earned as a salary. Also, they are guaranteed at least 8% return on the money that is set aside for them.

Because of this, I find it difficult (impossible) to approve any new taxes while my family finds itself without a pension and only our 401 to support us in retirement. Gov workers seem to be able to retire young and make a great living because the rest of us are working longer and harder than ever.

The citizens can't seem to get off this treadmill because there are now too many people working in government. Seems like the only way to break this is for the state to go banko.

2008 Mar 07 03:56 PM