Imagine it’s 20 years from now, the year 2026. After 43 years in which Social Security payroll taxes had been greater than Social Security payments, with the surplus used to finance the rest of the federal government (but also promised to future retirees), the Social Security system will have begun to run a deficit in 2018. Taxes will have been substantially increased, and many kinds of federal spending (housing subsidies at the top of the list) slashed to pay Social Security back, but now Congress has no choice but to bite the bullet and drastically slash Social Security benefits for future retirees. That’s bad for the 50% of private sector workers who have no retirement plan other than Social Security, and bad for the additional 30% who only have a 401K plan – a plan they now realize has nowhere near enough money to pay for decent retirement. The poverty rate among the elderly, who have been the richest and most privileged of Americans for the past 60 years, begins to soar.
Meanwhile, after pension enhancement after pension enhancement, public employees continue to retire with rich pensions in their 40s or 50s, demanding that everyone else pay to support their life of leisure thereafter. With the cost of pensions and retiree healthcare exploding, local government services are public services are being cut. Kindergarten is eliminated. Public parks are sold off as private recreation space for those who can afford them. The subway system deteriorates. High school class sizes soar toward 50. Pay for current public employees will be slashed under new contracts, to free up more money for pension payments. Local taxes soar, even as the increasingly impoverished young struggle to pay for private school so their children may be educated.
This isn’t a nightmare. It is the future we are arranging for our children and, if under age 50, for our future selves. And it will lead to the demonization of retired public employees, who will become the most hated people in the United States. This is the reason why, if things don’t change drastically, I can guarantee those public employee pensions will not be paid, even if federal a constitutional amendment, and/or the bankruptcy of every state and local government in the country, is required to take them away. It may be that Federal, State and Local debts aren’t paid either. Count me in as one who will be saying, loudly, on behalf of my children and grandchildren, that morally we owe nothing, because we have been had.
The New York Times is running a series on public employee pensions, with this article http://www.nytimes.com/2006/08/20/nyregion/20pension.html?pagewanted=1&_r=1 on New York City. You should read it. I’m not going to duplicate its work, but I will make some corrections and additions.
First, the Times said the city made changes in the way it calculates its pension deficit in 1999 “with the best of intentions.” They are swallowing a line of political bull. The City marked its investments to market at the peak of the stock market bubble, and increased the rate of return it expected its investments to make from that artificially high level, in order to make the funds seem like they had plenty of money. The city’s proposed rate of return, 8% per year from the peak, is higher than what I find reasonable to assume for my own retirement savings beginning at the bottom of the market in 2003. The Giuliani Administration then cut a deal with the unions, under which those with 10 years or more of seniority would no longer have to contribute to the pensions, in exchange for the unions agreeing to have the city temporarily cut its own contributions, freeing up money for tax breaks and extra spending during the former Mayor’s run for Senate. The state legislature then added a massive pension enhancement on top of that.
The result has been a disaster for the city’s taxpayers and service recipients. Why was the staffing at the Administration for Children’s Services reduced drastically, leading to additional child deaths, before the city changed course? To pay for pensions. Why were library hours cut? To pay for pensions. Why has New York City Transit been closing booths, cutting cleaning, and trying to get rid of conductors? To pay for pensions. Why was the property tax rate increased 18%, on top of increases in assessments? To pay for pensions. There hasn’t been and additional pain recently, because the economy is booming and tax dollars are rolling in. But when the economy and tax revenues turn down those pension requirements will turn up. Everything gets worse from here.
And still they go to Albany and demand more. And get it.
The Transit Workers Union attempted to use their monopoly hold on our economy to blackmail the MTA into granting a retirement at age 50 (instead of 55) though a strike, and can be expected to so again. After all, the legislature passed that pension enhancement without a single “no” vote (Pataki vetoed it). The Teacher’s Union, after releasing a report calling for all kinds of wonderful things for the city’s children to be funded with the Campaign For Fiscal Equity money, instead convinced the state legislature, including the Republican State Senate whose leader has called additional funds to benefit the city’s children “crazy,” to allow teachers to retire at 55 instead of 62 (it is 57 for those hired after 1995, but with an employee contribution that makes their pension worse than that of those hired before 1995). Pataki vetoed it also, but I’m sure they’ll demand Spitzer sign it in exchange for their support.
Second, the important thing is how public sector pensions compare with the private sector, and what private sector workers will be facing in 20 years, something the Times failed to stress.
Public employees have demanded an increasingly good deal in the marketplace to improve their standard of living. While seeking to deliver fewer services for more tax dollars by shifting money from workers providing services to retirees, they have demanded the opposite when they shop for themselves. And the private sector has provided it — by outsourcing jobs and cutting employee compensation. But not by cutting wage compensation, which is required to attract the young workers private businesses require to operate. Instead, private businesses have cut a form of compensation that young workers do not miss until it is too late – health and retirement benefits.
If you want know what private sector retirement benefits are, you can look here http://www.bls.gov/ncs/ebs/home.htm#data. But I’ll give you the punchline. Fifty percent of all private sector workers have no retirement plan at all. Nothing, other than ) Social Security, and the way things are going perhaps not that either. Only 21 percent have defined benefit pensions, with the rest relying on 401Ks. And, while in the 1980s when businesses switched from defined benefit pensions to 401Ks they substituted substantial employer contributions to those plans, most subsequently took those contributions away. So even for those private workers with 401Ks, they get zero retirement benefit from their employer. Moreover, most employees are not putting enough money in to retire without living in poverty in their 70s, let alone their 60s and 50s.
And even for those who have them, defined benefit pensions are going away.
One feature of a traditional defined benefit plan is virtually all of the rights to future payment are earned in the last few years before retirement. You can work in a place for 25 years, and your employer can owe you virtually nothing. But work that last five years, and suddenly the employer owes you a ton. Well guess what? Employers want to shift to a system where the amount they owe you goes up the same amount every year, a so-called cash balance plan. Not just for new employees. They want to switch plans for the existing employee who has worked that 25 years, start them with the very low balance they have already earned, and owe them no more for their last five years on the job than for their first five. Presto! Their pension has virtually disappeared, and is worth little compared with those who retired before the switch, and those who are newly hired and will earn more pension rights in their younger years.
Companies tried to pull this switch in the 1990s, but were stymied by age discrimination suits. Well guess what. The pension legislation President Bush just signed makes a shift to a cash balance pension legal!
Twenty years from now, imagine what those people without retirement plans, who will be looking at working in poverty into their 70s in the face of rising taxes and falling services, will think of those public employee retirement benefits? How about those struggling to drag their aging bones to work because they realize their 401K will only provide enough money for a few years? How about those who had private sector pensions, and had them reduced?
And what about future public employees, on the wrong end of one multi-tier contract after another, with their own pensions and wages reduced even as the pensions of those about to retire grant more to themselves? They will be blamed for collapsing services and soaring taxes, even as they struggle with staff cuts year after year.
Some have suggested yet another new pension tier for future employees. That would mean that once again the additional pension contributions and reduced benefits of future employees would go to subsidize the riches of those who went before. Even as the city seizes part of their paycheck and gives it to the unions that made such deals. When I was employed by the city, I resented every dime seized by the city and handed over to DC37 in exchange for its backing of incumbent politicians. I have just one word for any union that, since 1980, has provided lower wages or benefits for future public employees to balance the ongoing pension enhancements for those cashing in and moving out. Decertification! A fictitious crisis? Well, those unions assured everyone that the 2000 pension deal would not require any additional pension contributions. What actually happened? Simply put, they lied.
And do the unions think they can blame that other group of uber-powerful greedheads, the top corporate executives, and confuse the public so that in the end there is no retaliation against anyone? Think again! Guess what those executives have been granting each other lately to the detriment of the company, the shareholders, the customers, the employees, the future? Really rich pensions that pay out millions of dollars each year! The Wall Street Journal reports that much of the private sector pension hole, the hole that companies are demanding pension concessions from their unions to fill, is caused not just by rank and file pensions but by really rich executive pensions granted in recent years! So there won’t be two interests blaming each other, with the screwed general public split on who is responsible. There will be one cause of the misery of 80% of the public as their own senior years arrive. Pensions the powerful granted to themselves at the expense of the future – a future that by then will have arrived.
You’d think in the face of this future the unions would be pushing to push up the balances in the pension plans, rather than drain them, and make the case to keep them. Instead they demand more and more, thus providing themselves incapable of either empathy or enlightened self interest.
Unless we are at war, corporate bankruptcies, service cuts, tax increases, wage cuts to pay for those retirement benefits will be the one and only political issue in 2026. Retirement benefits future employees (and, someday, even future CEOs) will never get, and will by then know they will never get. That is why I say with confidence those pensions will not be paid. If you plan on being dead by 2026, understand the names of your generation will be cursed down the ages. But if not, understand what is coming. Either make it your top political priority to act now to limit the damage, or at least arrange your personal finances to adjust. Because the future is going to be ugly. And every year, the public employee union go up to Albany, and order the state legislature to make it uglier still.
What action could be taken that:
· Provides some equity between public sector and private sector employees;
· Permits the city to attract qualified workers to provide decent services;
· Doesn’t assure the future destruction of public services and the economy;
· Doesn’t sell out the unborn by (again) reducing the compensation of future employees to pay for the pension enrichments for current employees; and
· Provides some possibility that a person hired into the public sector today will receive the pension benefits they have been promised?
I’ll reveal my proposal in the fall. My back up proposal is default on debt and pension obligations. In some ways, the back-up is more realistic than what I intend to suggest later.