Many states have a constitutional requirement to balance their budgets while the federal government has no such limitation. As such, a number of stately are longingly looking toward Washington to throw some cash their way so they don’t go bankrupt. It is not going to get better.
If you think Washington awash in debt, is a problem, it is chump change compared to what is brewing at the state level. Trillions in unfunded pension liabilities are looming and those who are benefiting from those generous plans or who are going to, don’t care about the rest of us who have to pay for them and then go provide for ourselves.
Lawsuits are starting to be filed to stop states from altering the terms of these plans. The time to act is sooner rather than later, but that is lost on one teacher in Colorado who says, “Why is the state so quick to break its promises.” Perhaps we should explore how these promises were made, in both directions.
Unions backed Democrats almost exclusively. Democrats riding union support into office had a debt to repay. They repaid it by supporting the kinds of contracts that the unions wanted and the unions returned the favor with their loyalty. Who paid the bill? The rest of us. How much say did we have in the process, next to none. In private industry, unions negotiate with management. Unions have almost no say in who gets hired into management and will sit across from them at the bargaining table. So the adversarial relationship has management supporting the shareholders and unions backing the workers. As management became more enlightened and took better care of their employees, the need for a union middleman faded away. That is why in private industry union representation is down to about 7% and falling while in the public sector is around 37% and growing.
The public employees argue that their generous pension plans is merely deferred compensation to make up for their salaries during the time they worked. The only problem is that the unions did a good job not only on the pensions but on the salaries as well, so that the average public sector employee makes about 34% more than his private sector counterpart. Fair being fair, our public sector friends would probably recognize their good fortune and agree to help fix the problem, right? No chance. As one put it, “I shouldn’t be responsible for past pension underfunding and foolish risks managers made with my money long after I retired,” Okay, let’s give that a closer look.
Why do you think the pension is underfunded? Could it be that the government entity could not afford to make the extravagant payments the union contract required and still balance the budget? If they tried to raise taxes to cover the shortfall then even the unions with all their political muscle couldn’t get those responsible re-elected. So it was better to sweep it under the rug for a future administration to deal with. What about those risky investments? Well, with risk goes reward. If you need bigger payoffs on your pension assets to make up for the shortfalls in funding that you didn’t want to make, you may take bigger chances to make a bigger payoff. But if you are wrong, instead of fixing the problem, you make it worse. So the real problem is that the unions and the politicians they fought to elect negotiated contracts that were unrealistic and unsustainable. What does the union member say. “I’ve got mine, you go get yours.”
What are some of the onerous changes that states are asking for? In New Jersey, Chris Christie asked for a one-year freeze on public employees pay and for them to contribute 1.5% of their salary toward their retirement. Outrageous! How about in Colorado where they asked for a 2% cap in the Cost of Living Adjustment (COLA) for retirees instead of 3.5%, in an environment with 0% inflation. Dastardly! One individual’s justification was that he does not and cannot pay into Social Security so the pension is all retirees have to live on. He fails to point out that being prohibited from contributing to Social Security puts 6.2% more of his salary in his pocket, since he pays no Social Security taxes, and if he had the self discipline to take that and invest it in the Dow Jones Industrial Average he would have far more money of his own than he would ever get from Social Security.
This problem is not going away. Once upon a time, public sector employees did earn less in salary than those in the private sector, but those days are long gone. They earn more, can retire earlier, can retire with more money for longer periods of time and put the burden on all taxpayers who have to cover their pension while providing for their own. Their “too bad” attitude is shameful.
