Nowhere have America’s public and private sectors diverged more broadly than in the area of pensions. Private corporations, with lots of actuaries, lawyers and accountants on staff, figured out 25 years ago that traditional pensions were too unpredictable and expensive, and began the switch to “defined contribution” plans, like 401Ks and IRAs. As a result, most recent retirees or existing private sector workers have essentially “do it yourself” pensions where your own success and/or luck in investing your 401K, IRA or similar vehicle determines whether you retire at 60, 65, 70 or not at all.
Not so in the public sector, where there were lots of actuaries, lawyers and accountants as well, except they worked for the public service unions, and managed to slip all sorts of “fine print” details into contracts that never would have been accepted by private corporations. Among them are benefit formulas that allow for “pension spiking” where an employee can include overtime worked as part of their salary for computing pension benefits. As a result, thousands of public employees with salaries of, say, $75,000 per year, end up with pensions of $100,000 or $150,000, because they intentionally booked hundreds of extra hours of overtime during their final year of work. These clauses were slipped into thousands of public employee union contracts not only here in New York but all across America over the past few decades because (1) nobody was paying attention, and (2) the politicians who knew about it were mostly in the unions’ pockets via campaign contributions, or else knew the cost would mostly come due years later during some other politician’s term of office (by which time the earlier politician might even be enjoying an inflated pension of his/her own.)
Now the cost is coming due, with a vengeance. We will shortly be facing a choice in many states, especially those with big, highly entrenched unionized state and municipal workforces, of whether to use tax dollars to pay for current services (teachers, police, fire fighters, sanitation workers, DMV clerks, etc.) or to pay the bloated pensions of those who did these jobs years – even decades – ago. Besides having pensions that most private sector workers don’t have, they often have medical benefits provided to them on a subsidized basis or even free, while normal retirees not yet eligible for Medicare (or with younger families not Medicare eligible) have to struggle to pay huge COBRA premiums or buy high-priced private medical insurance.
As the gap widens between these two groups of pension “haves” and “have nots,” it will realign traditional political voting blocs. Younger public employees, seeing themselves laid off while tax dollars are shipped to earlier retirees now living large in Florida, Arizona and other retiree watering holes, may find themselves making common cause with private sector baby boomers (many of them retired early through job losses and layoffs) struggling to make ends meet on IRAs and other investment savings downsized by the financial crash and Great Recession. You don’t have to be a Tea Party member to be offended by the idea of bloated public pensions where people work 25 years earning X dollars per year and then retire at age 55 and collect 2 times X dollars per year as a pension for the next 30 or 40 years.
In the private sector there are plenty of legal precedents for breaking contracts that involved fraud and self-dealing, and there are bankruptcy courts for addressing companies that are unable to meet their obligations. But no such obvious mechanisms exist to bail out states and municipalities whose promises exceed their ability to perform.
What will happen when legislators find themselves having to choose between meeting pension obligations to retirees and having enough money to meet today’s essential services? This is uncharted legal and political territory. It is hard to imagine judges ordering legislators elected on “reduce tax and spending” platforms to do the opposite, or to hold them in contempt if they choose not to. But a legal ruling to invalidate past union contracts would be equally radical, and could wend its way through appeals courts and even the Supreme Court for years before it was finally settled. Although nobody knows exactly how these issues will be resolved, it is clear that the future financial health of our cities, states and nations is at stake.
(Published in the Journal News 1/9/2011 page 19A:
Pension issue pits public vs. private sector
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