We have been warning readers about the pension crisis for a few years now. In a nutshell, the problem is the following: California public employee unions – which are virtually unregulated despite the fact they operate in the uncompetitive public sector – have pretty much taken over California’s state and local governments. In recent years they have negotiated pay and benefit increases so dramatic that the average government worker in California often earns 2-4x what globalized private sector workers earn to do jobs of comparable worth. This dramatic disparity is largely due to the value of their retirement pensions. The present value of what someone collects in retirement must be applied to the years they work, in order to correctly value their annual compensation. And by that measure, pretty much every employee working for the state of California is a millionaire.
Please note there is a huge difference between unions that operate in the competitive private sector, and unions that now arguably control our public sector. Also please note this commentary is in no way meant to disparage the good men and women who work in the public sector to perform vital services for us. Moreover, this commentary is not suggesting we eliminate government services – on the contrary, this commentary simply advocates making taxpayer funded government services and benefits apply to all workers equally. Currently the public sector serves itself first, leaving the scraps for the taxpayers. This must be challenged.
During the internet bubble, then the housing bubble, most financial analysts understood we were experiencing unsustainable economic growth. But this didn’t stop the public employee unions from using these temporary surpluses as an excuse to serve their members at the expense of the taxpaying private sector workers. Crowing about excessive “executive compensation” collected by an insignficant handful of corporate executives, they demanded endless hikes in pay and benefits. The fact that they should have been comparing their compensation to their ordinary counterparts who work in the private sector was a fact they conveniently ignored. If politicians opposed them, they could be crushed in the next election. The fact their pension funds invested in the same evil corporations they routinely demonized was also conveniently ignored.
|Schwarzenegger’s disastrous attempt to
reform the public sector in 2005 was, ironically,
perhaps California’s last chance to financially
guarantee their state worker pensions.
Back in July 2004 I recall reading an ad in a local newspaper placed by someone who held regular classes to teach people how to get jobs with the State of California. The ad said “Land a State Job and Become an Instant Millionaire.” I read the ad closely, and kept a copy.
Space and copyright laws prevent publishing the entire text of this ad, but it was factual, and filled with comments like the following: “The California state government provides a “defined benefit” pension plan to each of its employees. Such “defined benefit” pension plans are far more generous than any 401K or defined contribution pension plan available from any other employer in the state! In fact, the plan is so generous that it makes the average state employee a millionaire after only 22 years of work!”
In this ad and others, written with an astonishingly complete lack of irony, the writer explained in detail how much an employee would have to save every year in order to acquire sufficient wealth to retire with an annuity this generous. In other ads, the writer explained how many days off California’s state workers receive – holidays, personal days, vacation, comp. time, and the “9/80″ program where they get yet another day off every two weeks by working nine hour days for nine working days in a row. Show me an example of a conscientious salaried worker in the private sector who doesn’t work nine hours a day! In all, most state workers get between 50 and 75 paid days off per year. There is a staggering cost for all this.
Now the chickens are coming home to roost. For years, California’s public employee retirement funds – and others in other states – have overestimated the rates of return they could earn, at the same time as they underestimated how long their beneficiaries would live. Despite being the biggest collection agencies the average local government has ever seen, and despite being able to heavily influence our elections, and despite salivating over the prospect of collecting carbon auction proceeds (the real reason “the war on global warming has only just begun”), the unavoidable truth is this: California’s public employee pension funds are no longer anywhere close to fully funded. Huge reforms are finally going to come – initiated not by political reform, but by fiscal reality.
The good news is by liquidating public employee retirement funds, and instead giving government workers social security like the rest of us, several benefits will accrue to society:
- What’s left in these public employee retirement funds can be transferred to the social security administration, bolstering the solvency of that fund.
- All workers will receive social security, instead of public sector workers receiving far more generous pensions. Having the same retirement formulas apply to all workers will create the critical mass of voters, at last, to demand genuine upgrades to the social security benefit.
- Public employees will no longer be slaves to their pensions – they can try out work in the private sector. Of course in the private sector they will no longer get 50-75 days off every year, but at least they won’t be slaves to their pensions.
- The biggest liabilities on state and local government balance sheets, their payables to the state employee retirement funds, will be wiped away. Nationally, eliminating these unpayable trillions in debt may very likely prevent the great depression of 2010 from happening.
- Government operating deficits will disappear. State and local governments will be able to fund investment instead of issuing bonds (translation, raising taxes – debt service on a bond is an expenditure, too, requiring tax revenue to service). With payments to public employee pension funds abolished, more cash will be able to go into public works and better public sector services.
For more on the pension crisis and how public sector unions and environmentalists have both helped create this crisis and are attempting to stop reform, read: Unionizing Silicon Valley, Unlocking California Gridlock, California’s Global Warming Act, Public Sector Reform, Unions, Ideals vs. Reality, Unions Aren’t Green, CEQA Hijacked, and California’s Deficit.