State and local government pension plans across the country are struggling, particularly since the dive in the stock market that accompanied the economic downturn, and Tennessee is no exception. The state's pension funds lost $10 billion last year. This means that the state (and, ultimately, taxpayers) will have to contribute more money to the pension system to make up for pension fund losses. Governor Phil Bredesen is proposing that the state contribute an additional $150 million to the Tennessee Consolidated Retirement System next year. County governments and school boards that participate in the state's retirement plan will similarly have to kick in more money.
The strength of public-sector labor unions and laws that prevent reductions to government employee pension benefits put public-sector workers in a unique position. While workers in the private sector are seeing their salries and retirement benefits eroded during the recession, the salaries and benefits of government workers are being maintained and even increased. This has led to justifiable consternation among taxpayers in the private sector.
As I told reporter Dave Flessner of the Chattanooga Times Free Press earlier this week, "Private sector taxpayers are tired of being responsible for more and more of their own retirement plans and also having to pony up more for government employees so those government employees can live better in retirement than they do." (An extended audio clip from our interview is available at the above link.)
Some claim that public pensions need to be greater than private-sector retirement benefits because government workers earn smaller salaries than their private-sector counterparts. According to Gov. Bredesen, "One of the tradeoffs in government at all levels is you get less cash money and you probably get better benefits." But while this argument might have flown a generation or two ago, it is clearly not true today. Now government employees typically earn higher salaries and much higher benefits than private-sector workers.
As Gov. Bredesen notes, "Government is attractive to people who want defined benefit plans and it is one of the few places in America left where you can still get those benefits." But that is precisely the point: private-sector businesses realized long ago that generous defined-benefit pensions are too expensive, contributions to them are too unpredictable, and they are ultimately unsustainable. That is why the private sector has been moving away from defined-benefit plans for the past 30 years or so.
Unlike private businesses, governments do not have to satisfy customers' desires or make a profit to continue to operate. If their costs (pension or otherwise) are too high, they can always go to the taxpayers well and command more of the public's hard-earned money. A tipping point seems to be coming, though. Taxpayer anger is approaching a point where they will finally say no to excessive government employee compensation. Especially during these difficult economic times, governments should cut back, as the private sector has been forced to do, and return to fiscal responsibility by adopting 401(k)-style defined-contribution plans in line with compensation in the private sector for new employees.