Public Pensions to Sap Taxpayers Weary of Financial Crisis

While the private sector has been shifting away from traditional defined-benefit pension plans for some 30 years, government employee union strength has allowed them to remain the predominant retirement system in the public sector. According to a recent report from the Center for Retirement Research at Boston College, of those with some kind of retirement plan, 80% of public-sector employees rely solely on a defined-benefit plan, while more than 60% of those in the private sector rely solely on a 401(k)-style defined-contribution plan. The report also notes that between October 9, 2007, and October 9, 2008, equity assets in retirement plans have dropped $4 trillion in value. The structure of traditional public pension plans is such that whenever there is a financial downturn, such as we are currently experiencing, taxpayers are hit twice: first, because the value of their own retirement accounts decline, and second, because they must make up for the shortfall in public pension funds because the benefit levels are guaranteed and state and local governments (i.e., taxpayers) are on the hook for whatever cannot be paid from pension fund returns. What is even more maddening is that public pension increases made during the boom times were often applied retroactively! As a recent Los Angeles Daily News editorial (“Double whammy: Bill for public pensions seems unfair,” October 29, 2008, available from paid archive at exclaimed,

We’ve already been paying more each year to cover the increasing cost of retirement benefits for city, county and state workers. But when the real estate market was booming, the stock market was hot and public coffers were full, nobody really paid attention to the extra expense. Now, with the nation’s stock market in the tank and investments worth significantly less than a few months ago, taxpayers are going to have to foot the bill to keep public-employee pensions fully funded in the coming years.

The California Public Employees’ Retirement System (CalPERS) reported that it had lost $48 billion (approximately 20%) of its value between July 1 and October 10 of this year, and a whopping $68 billion going back to last October (and that doesn’t even count the most recent market losses of the past six weeks). While CalPERS and government employees unions have claimed that market losses would not affect state and local governments because losses are spread out over a number of years, CalPERS has now warned that state and local governments will have to pay an estimated 2% to 4% more into the system, starting July 2010 for the state and school districts and July 2011 for cities and counties that participate in the CalPERS system, to make up for the losses. And note that California’s contributions to CalPERS jumped from $321 million in 2000-01 to $7.3 billion last year! By law, pension promises made to current government employees cannot be rolled back (although, as noted above, the unions have no problem applying benefit increases retroactively!). We can, however, close lavish benefit plans to new government employees and, at the very least, establish more reasonable benefits packages. Given the overwhelming temptation to ratchet benefits ever upwards (and the union strength to make it happen), however, we would be better off acknowledging the excessive volatility and ultimate unfeasibility of the defined-benefit retirement system (as the U.S. auto industry is now discovering) and shifting new government employees to a 401(k)-style defined-contribution system similar to that in the private sector.