The unsustainability of public pensions
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.