I think this is a game theory problem. CEOs (looking at you, GM) and politicians up against tough unions have an easy out with no "cost" to themselves. They pass the buck by placating unions with pension concessions so all seems well during their tenure. Long after they've collected their bonuses or enjoyed reelection, someone else gets to deal with the unsustainable consequences.
One solution may be to have taxpayers directly vote on benefits for public servants...make the unions take on the people who will be paying for it rather than temporary placeholders with no real skin in the game.
Assuming reasonably educated voters. But as we've seen in California, the ballot initiative process only helps the idea that can be distilled down to a compelling soundbyte and is championed by the deeper pockets.
I'm afraid public employee compensation reform probably loses on both counts.
Do you really think people are going to go to the polls and vote to cut pay for prison officers, police, firemen etc.? Sure, it may actually be legislation targeted at specific kinds of pensions and double dipping, but on TV it's going to be 'our cops and firefighters can't even put food on the table'.
Anyway, the whole point of representative democracy is to not have to consult the electorate for every little thing. Voting on pay is too nitpicky. The best alternative I can think of is that no one bargaining contract can run longer than 5 years, but that just swaps one set of problems for another.
Do you really think people are going to go to the polls and vote to cut pay for prison officers, police, firemen etc
Economics will demand it at some point.
I didn't visit HN for a few days, sorry I didn't reply to your comment at the time. It's not that I don't think it would be a good thing to change policies this way, I agree that economics demands such a change.
Where we differ is in our belief over whether California voters would actually pass such an initiative at the polls. On past forms, I think campaign slogans would beat out economics or critical thinking. I do think ballot initiatives are a good thing in general, but as a state we have also passed some very foolish laws, whose long-term impact was not appreciated at the time. 'Three strikes' leading to life in prison is the most obvious example.
Or to require that the value of the benefits start being paid down in a sustainable way immediately. Only if those who are benefitting from the delayed benefits are required to fund them will this problem really be solved. In the private lending market we call this a downpayment.
The Federal Employee Retirement Income Security Act (ERISA) requires that private employers that offer pensions do pay as they go.
Defined contribution 403(b) and 401(k) programs have to have their deposits made soon after each year end. Defined benefit plans are more complicated, but there are big federal fines for companies that fail to deposit the increase in expected value of future payments each year. There are extensive (but imperfect) actuarial rules in the US Code to make the actual minimum contribution match the needs of the pension fund. Big funds need to buy insurance, too, in case things go wrong.
States and municipalities are immune from the federal standards. That's why they're ignoring the consequences and just promising to pay pensions without depositing enough money according to their own actuarial computations. A private company would have had to cut back on promises or pay the full current cost of future benefits.
Heck, even the Federal Government is keeping up with employee pension planning. The trouble is all in states and municipalities.
The states know they are doing this; actuarial science is not a mystery. But governors and legislators figure that public employee unions must be satisfied. And the problem won't explode until they're out of office and then it's someone else's problem.
And we voters who don't hold them responsible are ultimately at fault. Public employee unions couldn't hold politicians captive if we were willing to vote out pols who kowtow to irresponsible demands.
In addition when you know an employee is going to cost you a lot of money in pension, the incentive to reduce the work force as much as possible is high.
You end up in a situation where your budget is used to pay for the retired employees and you have nothing left for active employees.
One of the reasons you are there is that it's pretty tempting for someone in command to offer a lot in pension. Under his command the budget remains clean and the employees are happy. That has got to ease elections!
One way to avoid that would be to change the way the yearly budget is computed so that it includes "known future expenses" clearly.
So, in other words, the bottom line in the budget should be delta (assets - liabilities). This is how individuals are encouraged to do their own budgeting; how would it hurt to require the same of the state?
Isn't there a government office that calculates that stuff? The long-term fiscal impacts of each bill? I want to say it's the GAO, but I don't think it is.... it's driving me nuts!
There are, but it's very easy to fudge the numbers. For example, New York State is supposedly one of the best-funded state pension plans around, but if you change the predicted annual rate of return for the pension plan's investment from 8% to 5 or 6% IIRC, it's suddenly deep in the red. Small looking obscure change, big difference.
"Under his command the budget remains clean and the employees are happy."
Don't any of these places have accountants? Surely, there should be some requirement to recognize the future costs being taken on, properly discounted for net present value?
I could see some definite pros to that. I'm trying to think of problematic things that might also get banned as a result, and not thinking of a lot. One thing that'd get banned along with large pension promises, if that rule were applied consistently, would be golden parachutes.
Remember, this is one side of the debate. There's a lot more to the story than you're reading here, so perhaps you should hold off on the laughter.
I generally agree with the governor, but I also tend to believe that the state has to make good on past obligations -- especially when real people have planned their lives around those obligations. The 55-year-old retiree with fat benefits is a political straw man, but reality is much less clear.
They do, and the biggest part of those projected costs is the healthcare for retirees. Many government insurance pools are self-insured, and old people consume a lot of healthcare.
But the Berkeley professor is still right in a way. Every single dollar in future retirement pay or health benefits for a public employee was negotiated in good faith in exchange for lower pay right now, this year, so we can balance the budget. Throw in term limits and a little demagoguery and politicians have every incentive to cut a deal that balances the budget this year while kicking costs down the road.
So when the Prof mentioned that for the last 30 years, our society has been taking out a loan for our kids to repay, he was still correct, especially when looking at these graphs.
This is the reason my replies on that topic focused so much on total outlay issues, rather than education spending directly, which seemed more directly on topic. I had a hard time expressing my logic, but it was pretty much the issue of the amount of spending on potentially useful things getting crowded out. It's easy to frame it in terms of people not wanting the government to have their money, and I felt the professor tried to establish that with some of his phrasing, but that's not the real problem that needs solving. The problem is allocation.
Basically, yes - pensions are a problem. But the graph on the number of California gov't employees that lost their jobs vs. private sector employees may be misleading because we _need_ the public sector employees to service basic needs in the state, and California employs one of the lowest number of public sector employees per capita of any state.
I have a feeling those graphs are more than a little fishy - the bottom one especially. Retirement costs went up ~5X from 2000 to 2010? And they'll go up by the same from 2010 to 2020? I call BS.
1) Many pensions are underfunded. The state has to play "catch up" because they weren't putting enough money in the fund in the past.
2) Pension funds play the stock market. In a recession, the fund needs more money because the market is down.
3) (I'm not sure this is the case for California, but it's definitely the case for the federal gov't) The gov't often guarantees pensions issued by bankrupt companies. The gov't just takes on the extra debt, and often bankrupt companies don't keep up with their pension contributions.
4. The boomers are just now hitting retirement, so the number of people retiring in a given year is increasing (Actually, it'd be interesting if somebody could pull out some hard numbers on this - I've heard this spoken of anecdotally a lot lately).
5. Retirees are drawing on their pensions for longer because they have longer lives.
The label on the 2nd one is off. WSJ states that it is in Billions and then has 5000 on the left hand scale. I'm pretty sure California doesn't have $5 Trillion in Pension costs.
Pretty sloppy fact checking.
That's the total projected pension cost for each year from now until the last currently retired employee dies, which may be 30+ years from now. So it's not debt, per se, since that cost is amortized over the same 30+ years. It's a projection of the total cost over that time period.
Its not BS at all. Many states have problems with this. And if you even get close to state budgets at all which very rarely do citizens do, you will see this problem in more than just a few states and cities and even counties...
I agree that California and other state and local governments have a problem with pensions. What I'm saying is that the graph severely overstates the magnitude of the change in costs over the past and future decades.
