Is the taxpayer backstop the root of pension problems?

June 21, 2011

Public workers have been protesting against the reduction of their benefits in several states. It got a more than a little testy in Wisconsin this winter, which has led to several recall elections for legislators there.

It is the right of public workers to push back when they believe they have been treated unfairly. But it is also the responsibility of public workers, and especially their union leaders, to help create a realistic, sustainable benefit scheme for themselves. Too often union leaders insisted on more and more benefits and lower contributions while ignoring the damage done to the viability of their pension plans.

Maybe they didn’t worry because they knew that taxpayers would have to make up shortfalls in underfunded pension plans. Maybe the guaranteed taxpayer backup is the root of our fiscal problems. It has placed all the responsibility for fiscal prudence on elected officials who often are easily swayed by well-organized constituent demands.

Michael Powell of the New York Times lays it out brilliantly:

…Stephen M. Sweeney, the Senate president, a Democrat and a high official in the ironworkers union… cut a deal with [New Jersey] Gov. Chris Christie, the congenitally pugilistic Republican, in which — if the Assembly goes along with it later this week — all the public workers in the state could be forced to swallow large increases in their contributions to their pension and health benefits.

Mr. Sweeney agreed to revoke the right of unions to collectively bargain for health care.

Nor is he particularly apologetic. Ask him about the unions’ presidents who howl for his head, and he shrugs. To his mind, he’s exposed a family secret in Trenton: The pensions and health care plans are unsustainable, and union leaders have known it for years and said nothing.

“They lied to their members,” Mr. Sweeney said. “When I say lied, I mean it. They lied.”

This is pretty damning condemnation from an insider who was party to the state and worker dynamic. Senate Leader Sweeney observed the following pattern: demands for more benefits, amnesia and now whining. It’s not fair to pin this fiscal crisis solely on the government and taxpayers. Workers and their leaders were complicit.

The Federal Reserve Bank of Minneapolis put out a piece in January on public pensions and their substantial problems.  In it, they list “good housekeeping” rules:

  • Make the necessary contributions every year.
  • Don’t promise benefits that you can’t guarantee with assets.
  • Align fiduciary responsibilities with decision-making.
  • Don’t chase investment yield.
  • Spread and share risk.
  • Plan for a rainy day

Funding and stabilizing public pensions will take the participation of all parties. Otherwise a more drastic remedy will be needed, like new legislation removing the taxpayer as the backstop for pension shortfalls. I’m not sure that we want to go there.


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There must be some form of protection for the taxpayer; if not in the form of a viable tax prescription to fund the pensions then some other formula to offer protection. The temptation to steal, from years ago, seems to have morphed into a right.

Posted by solon | Report as abusive

Yesterday, Reuters: NJ will need to raise taxes $200.00/month for life for every household, to meet exsisting pension legacy costs says it all folks! takes a crisis for people to change-we’ve arrived! Keep it civil and ask not what your country can do for you!

Posted by DrJJJJ | Report as abusive