The unsustainability of public pensions

By Cate Long
September 2, 2011

Public pensioners everywhere should be worried today. There is devastating news from Central Falls, Rhode Island as the city’s receiver has cut the monthly pension payments to retirees. From WPRI.com:

Central Falls slashed one in three of its retirees’ pension checks by more than half this month, with the majority of the city’s former public-safety workers set to lose tens of thousands of dollars a year.

Receiver Robert Flanders reduced 48 of the city’s 141 police and fire pensions by 50% or more, with all but three of those cut 55% from their original amount, according to financial records obtained by WPRI.com.

This is not a surprise as Central Falls had filed for bankruptcy on August 1st and the receiver for the city had announced he would be taking this action. He stated at the time that the city’s pension funds were far from funded but has never given a public account of their finances. There are also deeper issues for Central Falls and Rhode Island as they intend to pay bondholders 100 cents on the dollar while reducing pension benefits.

The plague of underfunded public pension plans is spread across America. Retirees and taxpayers everywhere should be worried. There are many reasons for widespread underfunding and they have been covered up by the opaque disclosure and accounting requirements pension funds have.

It’s easy for state and local treasurers to “smooth” results in a way that allows the legislative branch to postpone making the necessary contributions to bring the funds up to healthy levels. There have also been grants of benefits that are much too generous and many instances of rule-bending where employees have puffed up their benefits. Public worker unions have often used their influence to gain very favorable benefits and block changes. Benefits to workers were accrued over decades so it’s likely that it will take years to modify these benefits.

New Jersey passed legislation in June that raised worker pension contributions, lowered cost of living adjustments and adjusted eligibility requirements which would delay the time when qualified workers start receiving benefits. On Wednesday in reponse, twenty New Jersey unions filed suit against the state to block the changes. It’s understandable that unions would fight to retain as much as possible but many pension plans as currently established, especially New Jersey’s, are not sustainable. All sides must be realistic about what can be supported over time.

Public workers have a strong argument that they have earned their pensions. But they have a weak argument asking taxpayers to pay additional taxes to make up shortfalls in pension plans. The average public pension payment is less than $30,000 per year according to the SEIU but this is much higher than the average Social Security benefit at $14,172 per year.

Public pensions are entering a new area. Shrinking public budgets and continued funding problems are requiring changes. How will the change come? Through bankruptcy courts, legislative changes or litigation? Public workers are essential for a stable and smooth functioning society. But their needs must be balanced with the demands on taxpayers. All must come to the table and all must deal fairly.

8 comments

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Yours is a very rational, sensible stance, but it seems to glide over the responsibility taxpayers have for the choices they make when they vote in politicians who make promises that backfire long after they’re out of office.

I don’t think it’s a weak argument to suggest that voting has consequences. If you put incompetent politicians in office who perennially promise low taxes by underfunding pensions, when the bill comes due it should be paid.

I had no choice to contribute into my public pension, but I did so with the assurance that it was, in a sense, a form of deferred compensation for work I agreed to do. To clawback that compensation because voters now regret hiring irresponsible fools to run their governments is horrifyingly unfair and unjustified.

If it’s necessary to clawback money I earned, then a similar clawback should be made for the taxes that should have been paid in the past which led to the shortfall.

Again, voting has consequences. It’s not right to expect public employees to bear the brunt of voter’s foolish choices.

Posted by jpmist1 | Report as abusive

Making changes that renege on pension promises could be legally perilous, Rhode Island officials said, although they are heartened that judges have upheld the benefit cuts implemented in Colorado and Minnesota. And they think the growing intensity of the crisis might make unions more willing to compromise.

http://www.washingtonpost.com/business/e conomy/rhode-island-considers-radical-mo ves-as-pensions-put-state-on-brink/2011/ 08/31/gIQApBjz4J_story.html

Posted by Cate_Long | Report as abusive

NJ happens to be an expensive state to live in. We also have one of the largest population of millionaires.

If SS paid more the country would be much better off right now because people would have money to spend, which generates more sales tax revenue.

Posted by toyotabedzrock | Report as abusive

The President,as leader of his party, once again expressed that every American should pay his fair share in taxes. One sizable loophole in the Federal Tax Code is TAX EXCLUSION INCOME. It is time to do something about this unfair tax revenue placed disproportionally on small business & especially the self-reliant. The President is correct we are all in this mess together. It is time to correct the inequity of Tax Exclusion income for some rather than for all workers earning income & paying taxes on all received income. There is no reason for this inequity especially after the President many request for equity.

Posted by buckaroo5 | Report as abusive

The firemen and police unions back candidates for public office with money and volunteers – this is the same as the workers at a corporation voting for their bosses. Workers at factories selecting their bosses did not work in Soviet Russia in the 1920s and was abolished – he hasn’t worked here it destroys the economy with wages and benefits that are not sustainable.

Posted by factsnotbeliefs | Report as abusive

Strange how these pensions were sustainable for decades, until Reaganomics.

Posted by seattlesh | Report as abusive

Someone please tell me what or who is MuniLand!

Posted by IRATESCEPTIC | Report as abusive

Thanks for checking in IrateSceptic.

Muniland covers state and local government issues with a nod to the federal government occasionally. I cover municipal bonds and fiscal issues. I’m Cate Long and my background is in the sidebar.