When it comes to the mounting nationwide pension crisis, it’s best to follow the advice, “At first, do no harm.”
Nationwide, unfunded public and private pension liabilities are at an unfathomable $800 billion. That’s the amount of benefits owed, beyond the funds available to pay them. USA Today reported last month that “taxpayers will soon get a surprise bill that could exceed $1 trillion for the cost of paying future medical benefits for state and local workers who retire.”
Those enormous numbers are nearly impossible to grasp. The problem stems from the willingness of corporate leaders and, especially, legislators to grant unsustainable levels of benefits to unions. Unions constantly demand higher benefits, and rather than risk strikes, corporate leaders have bought labor peace by essentially giving workers what they want. Politicians risk their political futures by saying no to government unions, so they have foisted the problem of paying for these benefits onto future generations.
At least in the private sector, companies are forced to deal with the problem, sooner rather than later. Bottom lines still matter, and companies such as General Motors, Delphi and Ford that have been too generous with pension dollars are facing serious financial repercussions, including possible bankruptcy. The New York Times reported that Japanese automakers, which have been far more willing to require workers to pick up the tab for retirement and health costs, and have fewer workers to support, have gained an enormous competitive advantage over the fiscally less-prudent domestic carmakers. One private company after another is switching from defined-benefit retirement plans, where workers are promised a set amount of retirement pay, to defined-contribution plans, in which the only thing promised is a set contribution. Then it’s up to the marketplace, and employees’ investment choices, to determine their rate of return.
In the public sector, however, the problem is harder to fix. Governments rarely go bankrupt, there is no bottom line, no shareholders who exert pressure when profit sags. Even in the face of crisis, it’s difficult for the government to react.
The Sacramento Bee explained recently that California is the odd state that allows pension benefits for state workers to be based on the final year’s pay rather than a three-year average, which leads to all sorts of pension-spiking schemes by workers (inflating overtime, switching jobs, etc.) that are costing taxpayers an additional $100 million a year. A simple fix would be in order, but state-worker unions are too powerful.
The federal government has a $2.3 trillion unfunded liability for federal retirees. Then there are Social Security’s looming problems, as the baby boomers retire, and the amount of money being paid into the system will be outstripped by the amount being paid out to retirees. We all know what happened when President Bush tried to make even modest tweaks to the unruly Social Security system.
The result, at the local, state and national level, unfortunately, will be massive tax increases, increased bond debt and cuts in other services. There are few other choices.
Even the growing private pension debt could be foisted onto the public. The quasipublic Pension Benefit Guaranty Corp, which insures the pension obligations of companies, is running a $23 billion deficit, according to the American Enterprise Institute. Ultimately, the taxpayer could be on the hook for the deficit.
Perhaps if the public gets as concerned as it should get about this problem, elected officials will stop making matters worse and start dealing with the large problem at hand.