Ignore the Union Leader Behind the Curtain
As discontent with public employee compensation grows, the latest fashion from the Left is to claim that public workers are being scapegoated. Yesterday, Gawker even ran a piece called “The Plan to Blame Unions for Everything,” arguing that the real causes of states’ fiscal woes are failures to properly fund pension plans and a financial collapse caused by greedy bankers. Without problems caused by other people, there would be no crisis in employee compensation-so don’t blame the unions.
The problem with this account is that it is false. While many states were in fact reckless in their pension funding practices — New Jersey and Rod Blagojevich’s Illinois being the poster children — even states that followed the pension management rulebook are facing a cost explosion, and must re-evaluate their employee compensation practices to cope with budget gaps.
Take my home state of New York. We came into the recession with some of the best-funded pension plans in the country: we made our required pension contributions every year and were over 100 percent funded, if you follow the overly-rosy accounting practices that public pensions are allowed to use. Pension management practices were by most accounts appropriate, notwithstanding a pay-to-play scandal in one of the state’s pension systems.
Yet, pension contribution rates are skyrocketing and will continue to do so. By 2015, pension payments by school districts will more than quadruple from their levels in 2010, requiring a property tax increase of 18 percent just to pay for higher pension costs. Contributions for other workers will rise nearly as sharply. In fact, New York’s practice of funding its pensions relatively well exacerbated market effects on required contributions: if your pension fund holds few assets, it’s not very exposed to stock market downturns.
The fundamental reason for the pension mess is that nearly three decades of bull markets made pensions look cheaper than they really were, and led lawmakers to hand out pensions that were unaffordable except when bolstered by lucky investment returns. That holiday from market reality is over. In closing budget gaps, states must now ask questions like “are pension benefits too generous?”
The answer varies from state to state and from city to city. But in many places, the answer is a clear “yes.” If you feel like raising your blood pressure, go check out the Empire Center for New York State Policy’s pension calculator to see what kind of pension you would be entitled to if you worked in New York government.
Union leaders like to point out that government pension benefits are not so kingly on average: the average government retiree in New York draws a pension of about $27,000. But that figure includes part-timers (yes, you can get a pension for part-time work) and people who spent only part of their careers in government.
Full-career employees, especially those in higher-paid roles like police, firefighters, teachers and administrators, do quite well. It is not atypical for a full-career teacher working in a suburban district downstate to retire at 59 with a pension of nearly $80,000 per year, adjusted annually for cost of living.
That pension is not subject to state and local taxes and, unlike many private-sector pensions, does not include an offset for Social Security benefits. Buying an equivalent annuity would cost you more than $1.5 million. Upstate, where salaries are lower, the figure might be closer to $1.2 million. The formula is simple: work 37 years as a teacher in New York, and retire in your 50s as a millionaire.
New York can’t afford to go on like this. While we ought to honor the promises we have already made, it’s time to reduce the benefits that workers (both new and existing) can accrue in the future. Other states like California and New Jersey have similarly padded employee compensation and worse fiscal situations, making cuts even more necessary.
I do think the unions are right about one thing here: we shouldn’t blame the unions for this mess. Public employee unions have done exactly what they are supposed to do: they have advocated vociferously and effectively for their members’ interests in negotiations against management. The trouble is that, when the employer is the government, all the rest of us are management.
Yesterday, in announcing a wage freeze, New York Governor Andrew Cuomo called his policy necessary and said “This is not political theory. These are numbers.” Fundamentally, paying government workers more means that taxpayers-everybody else-must keep less of their own money.
When liberal commentators call criticism of public employee wages a scapegoating ploy, they are trying to reintroduce a left-right dynamic and a team defense of public employee benefits. But voters are realizing that the money simply is not there anymore-and whether the unions like it or not, they will be applying more scrutiny to public workers’ pay.
This piece originally appeared in RealClearMarkets
This piece originally appeared in RealClearMarkets