The public employee retirement system contains a slew of inequities that benefit the politically powerful – public employees with seniority – at the expense of everyone else, including more recently hired public employees, and the future. These inequities and negative future consequences grow year-by-year, contract-by-contract, one act of the state legislature after another.
Public employees aren’t grateful for their rich pensions, if their unions are to be believed. Instead they resent the modest pay that often comes with a public sector career, sometimes using it as a rationalization for modest performance. And low pay and limited respect, combined with rich pensions, affects the type of worker the government can attract. Along with increasingly cynical and disappointed idealists that signed on out some idea of “public service,” public agencies tend to attract only those who, from their first day of work, look forward to not working.
Moreover, not all public employees are treated alike. Whenever there is a fiscal crisis (with pension sweeteners often a significant cause), public employee unions typically negotiate lower wages, less generous pensions, and reduced other benefits for new hires. There have been several cycles of these “screw the newbie, flee to Florida” contracts. The most recent examples are the New York City teacher’s contract, which provided a lower cost of living adjustment for new teachers but included an agreement with the Mayor to pursue an age 55 retirement, the New York City police and fire contracts, which will pay new employees 40 percent less, and the New York City general employee contract, which will pay new employees 15 percent less. As a result, public agencies are faced with both high labor costs – mostly paid to those no longer laboring – and an inability to hire motivated and qualified staff. The problem is particularly acute for the City of New York and New York City Transit, which have separate, more expensive, more significantly under-funded pensions.
Politicians in, or running for, executive office, including Mayor Bloomberg and candidate for Governor Faso, continue to propose lower wages, lower pensions, and diminished benefits – but only for new employees. They ask nothing back from those who have taken for themselves far better deals, including the state legislators themselves, who benefit from many of the pension sweeteners they pass. Meanwhile, the public employee unions and state legislature have become even more brazen about handing out billions of dollars to those cashing in and moving out. They aren’t waiting for the pensions to be temporarily over-funded, as in the past. Instead, even as services are being cut and taxes increased to pay for the existing pension hole, the state legislature has passed vastly expensive rights for transit workers to retire at age 50 instead of age 55, and other workers now age 52 or more (but not those younger) to retire at age 55 rather than age 62. Unanimously. Hundreds of bills benefiting smaller groups of public employees, particularly those in the under-funded New York City system, pass each year. A quick estimate provided by the beneficiaries typically claims little or no cost. When the cost “accidentally” higher than promised, the unions gladly agree that new employees, service recipients and taxpayers will be sacrificed yet again.
This has to stop. All of it. Because the public employee unions and the state legislature apparently have become incapable of even enlightened self-interest. Rather than laying low, and hoping that everyone else will fail to notice their unearned privilege and go on sacrificing more and more to pay for it, they feel free to breezily take more and more without ever considering the consequences for others. They will take and take until a reaction sets in, and when it does in 15 to 20 years or so, as I have forecast, those public employee pensions will not be paid. No matter what it takes, no matter what the consequences. The rest of us will have little or nothing left to lose.
All it will take for the reaction to set in is the passing of the generation of private sector workers that also received defined benefit pensions, and the arrival in old age of the first generation that, for the most part, will have nothing but a shrinking Social Security check and poverty awaiting them. When those same increasingly impoverished seniors and their children face drastically reduced services in order to pay for public employee benefits and pensions they themselves are denied, the fairness of those pensions will rise to the top of the political agenda. And given how many of those benefits were enacted by state legislation, or agreed in contracts that provided offsetting compensation reductions for future public employees, the myth that retiring public employees sacrificed pay for a later life of ease beginning at an early age will be believed by no one, other than those self indulgent retirees themselves. It will be war.
What will it take to head this off? I propose the following.
New public employees should not be enrolled in a new pension tier. They should be enrolled in an entirely separate pension system, with all savings due to less time in retirement and higher employee contributions offset, dollar for dollar, with higher pay in the present. Any and all savings from less generous pensions for new employees, therefore, would accrue to those very same new employees, not existing employees (as is the past practice). Rather than once again shifting money from younger employees to those cashing in and moving out, this plan would merely shift compensation for new employees from a future time when they are not working to the present when they are working.
In the new system health benefits, as well as retirement income would be pre-funded. The employees would fund the entire cost of the new retirement system, and money set aside to cover future retiree health benefits, themselves, with no employer contribution. Their salaries, however, would be set much higher that than of existing employees to offset the additional required deductions. All the money would be the property of the future retirees themselves, not the government.
Some have proposed that all future employees be enrolled in a 401K, defined contribution plan. That would have been a good idea 25 years ago, when most private sector employers made that switch. Private companies realized that employees valued future retirement income less than current spendable cash income. But in ten or 15 years, the plight of the soaring number of seniors facing poverty will change that equation. Today, the typical cop or firefighter might feel $2,000 worth of gratitude for a pension that costs New York City $46,000 per year. Tomorrow, that cop or firefighter might feel $15,000 worth of gratitude for a pension that costs $10,000. So now is not the time to get rid of pensions altogether.
Still, any defined benefit pension has to be modified to account for increasing lifespan. I propose that pensions provide a guaranteed average time in retirement rather than a specific age of retirement. Those in physically demanding titles would be given 15 years until the average time of death in exchange for 25 years of work, while those in other titles would receive 10 years until the average time of death for 25 years worked. The number of years of pension income earned would be accrued on a pro-rata basis, and an employee could leave public employment at any time, and have their benefit adjusted for inflation until the time came to collect. Employees who wanted to begin their life of leisure earlier could sacrifice more, and save more in a 401K to pay for it, if they chose. But retirement income in the years before a worker or spouse’s death, when work is not possible, would be guaranteed. (For those in non-physically demanding titles, a 401K-only option with the same value could be offered as well, provided that the employee contributes an equivalent amount to that plan rather than the pension.) Again, since these benefits are less costly than the current system, the entire savings to the employer would be offset by higher pay for new hires.
Such a system would be a much better deal than the current one for those who are not sure they will spend their entire career in the public sector, those entering public service in mid-career, and (because their diminished benefit would not be used to offset richer pensions for those hired earlier) new hires in general. I would permit public employees with fewer than 10 years in the existing pension system to shift to the new system, taking their contributions and employer contributions with them. Those with more than ten years in, who have stopped contributing to the pension system, would be left where they are. Their salaries would also be left where they are.
What difference does it make, and how would money be saved, if public employees received higher pay but had the additional money deducted for their pension and retiree benefits? Wouldn’t the money the same either way? Yes in the short run, but in the long run it would make all the difference in the world.
· Public sector pay, the dollar figure that people see, would then include the value of pension and retiree health benefits, which would make public employment more attractive to prospective employees who are not shrewd enough to make actuarial calculations to factor in the real value of those benefits themselves.
· Public sector pay would also be reported to the public in a way that made it comparable with that of private sector employees, most of whom do not receive pensions and retiree health benefits. This is a matter of fair disclosure, and would make it more difficult for public employee unions to claim their members were underpaid, simply because the value a huge share of their compensation is hidden and its true cost deferred.
· Since the value of the retirement benefits would be included in their current pay, both public employees and the public would feel like they were being paid more while working. Smaller wage increases would therefore be needed to attract and retain qualified and motivated public servants. Given a legal requirement of total compensation parity, which ought to be included, those smaller wage increases would apply to existing employees as well.
· Public employees would be less likely to press for pension enhancements if they would have to fund them out of their own paychecks. Their indifference to the rising cost of retiree health benefits would end once every increase in cost for existing retirees led to an increase in the amount of the pay of current employees that had to set aside to pre-fund similar benefits for themselves.
· With new public employees in a separate system, it would not be possible to raid their contributions to pay for richer benefits and higher pay for those who preceded them, as has been typical in the past.
· When the reaction against public employee pensions sets in, those in the new system would be insulated from public anger by the fact that every dollar in the system would have been deducted from their own paychecks.
· Since pension contributions and pre-funding of retiree health benefits would be a deduction from (a higher level of) current pay, the government would not be able to, in effect, run an off-the-books debt by deferring those costs into the future.
The last point raises a very important disclosure issue. Today’s taxpayers are upset with the value they receive for the tax dollar, in part, because much of the money does not go for today’s services. It goes to fund the deferred costs of yesterday. Taxpayers deserve to know this, just as shareholders deserve to know when CEOs award themselves stock options and pensions to defer the costs to the future, while using accounting tricks to take credit for revenues that will not arrive until the future. The idea is the same, as are the consequences of deception: those with power gain unearned wealth at the expense of everyone else, by deferring and hiding the cost.
To show people what they are paying for, local property tax bills, and the state income tax, should be reduced to the point where the cost of allowing public employees to retire before age 65, and the not-pre-funded cost providing health benefits to retirees, is not included. Instead, the cost of these benefits should be included in a separate “early retirement surcharge” added to the tax bills separately for all to see. For New York City Transit, a surcharge could be added to the transit fare. Rather than charging $2.00 per ride but providing a discount when a Metrocard is purchased, the agency would charge, say, $1.50 per ride but impose a surcharge when the card was purchased to cover the cost of paying for early retirement. After all, that money isn’t going to pay for the transit system. It is going to Florida.
There are two great things about the “early retirement surcharge.” First, it helps to identify for taxpayers, in a way they are likely to notice (not in the newspaper), how much of their tax bill, fare or other fee goes to pay for past administrations rather than the current administration. This would lead to some counter-pressure on the state legislature that would enable it to resist ever-escalating demands. And second, if coupled with the pension modification I propose, the “early retirement surcharge” would fall every year the state legislature failed to enact more pension sweeteners for those in the current system, as new employees comprise a greater share of working and non-working public employee population. Eventually, it would disappear. Citizens would see more of their tax dollar going to services and benefits they actually received, even as employees in the new system saw their share of the retirement and health care savings grow. More on these effects in my essay on what I would do about debt.
It is not enough for me that next administration to merely refrain from imposing additional pay and benefit reductions on new employees to pay for additional pension sweeteners and raises for existing employees. I believe past multi-tier contracts should be reversed by future contracts that benefit those hired on less advantageous terms disproportionately.
The state laws governing arbitration should be modified so that arbitrators are charged with providing higher wage increases for those who have been on the wrong end of such contracts, until total compensation is equalized among those hired under different rules. Among current employees, those who have been stuck with lower wages, lesser pensions, and diminished holiday and vacation days would get higher raises until the value of those victimizations was entirely paid back – even if no money was left for any raises for those with more seniority. New employees would also receive higher pay to offset any disadvantage. To take money back from the retirees who had the best deals, such retirees could be required to pay for a higher share of their health insurance premiums.
If nothing else, such a modification to the rules under which contracts were arbitrated would result in fewer contracts going to arbitration. And by merely proposing it, the next Governor would be standing up for generational equity, a concept that will become more and more important to more and more people in the years ahead. The job of champion of everyone who was not “at or over 55” when President Bush spoke those words is, sadly, open and not being contested. Future taxpayers and service recipients deserve decent quality services at an affordable price, not a larger and large tax bill increasingly dedicated to the future citizens of Florida. And those public employees who grabbed more for themselves and sold out their unborn ought to pay a price for their deeds. The time to begin restoring generational equity is now. The alternative is generational war.