Retroactive Pension Benefit Increases Should Be Illegal

An Orange County Register editorial the other day rightly criticized the practice of retroactively awarding pension benefit increases. As the editorial explains,

The county and the state are struggling under an enormous amount of unfunded liabilities caused by an unsustainable level of pension and health-care promises made to government employees. Essentially, pro-union legislators have raided the treasury on behalf of their allies and haven’t worried too much about the costs to the future.

In 2001, the O.C. board voted 5-0 to retroactively increase pensions for long-serving deputy sheriffs, allowing them to retire at age 50 with 90 percent or more of their final year’s pay. Even those deputies who were ready to retire were given the pension boost for past years’ service. As Girard Miller of Governing magazine has pointed out, “the practice of awarding pension benefits on a retroactive basis is the devil’s doing. . . . They serve no purpose except to buy favor with incumbent union members … at the expense of future taxpayers who don’t even know what hit them.”

[. . .]

The current board’s lawsuit questions the constitutionality of retroactivity — calling it a gift of public funds for past service. This is a compelling legal argument that needs to be hashed out in the courts. The deputies union, which has never seen a tax dollar it hasn’t wanted to spend, is all of a sudden outraged by the $2 million legal tab for the lawsuit. These strike us as crocodile tears.

Pension benefits are essentially written in stone and cannot be reduced for current employees because many employees have been working for many years under the assumption that they will be receiving a certain level of benefits from the state in their retirement, and they make numerous financial and lifestyle decisions accordingly. Apparently, the logic does not work both ways, however. Labor unions are happy to lobby for more money than their members expected to receive when they retire. As Sacramento Bee columnist Daniel Weintraub noted back in a 2003 article on the emerging public pension problems in California, such retroactive benefits are “not only for future employees but for workers whose retirement contributions had been based for decades on the expectation of a lower benefit.”

The Orange County retroactive pension increase in 2001 followed on the heels of the State of California’s own retroactive pension increases made possible by the passage of SB 400 in 1999. That boosted pension increases of up to 50% for state employees and ushered in an era of “3% at 50” pension plans (employees can retire as young as 50 and earn benefits of 3% multiplied by the number of years worked, up to a maximum of 30 years, or a total of 90% of their final salaries) for California Highway Patrol officers, “3% at 55” benefits for peace officers and firefighters, and “2% at 55” benefit for other state workers. Local governments quickly followed suit to match the state’s increases.

These benefit levels, adopted during the height of the “dot-com” boom, were never sustainable, however, and when the markets–and resulting pension fund returns–inevitably turned sour, state and local governments were left to make up the difference at a time when they were suffering their own fiscal troubles and could least afford to do so. The current recession has compounded the problem. The only silver lining is that it has helped to reveal what years of exceptional returns had kept hidden for so long: that the government simply cannot afford to pay the benefits it has promised.

One can make a case that governments should not be able to suddenly slash benefits drastically for those nearing retirement age, but if you accept that argument then retroactive benefits should also be illegal. Moreover, it is time to “right-size” public pensions and bring them back in line with those of the private sector. Private-sector taxpayers should not have to subsidize the ever-growing gap between government employee compensation and their own.