California's Deficit

For 2008, California’s state government needs something like $14 billion more than they think they’re going to collect. It is absurd to cut services. It is absurd to lay off workers. And it is especially absurd to raise taxes. All we have to do is end the injustice of “two Californias,” where public employees have retirement benefits far in excess of what private sector taxpayers – whose taxes fund those pensions – can ever hope to receive.

As we believe we demonstrate in the online interactive spreadsheet “Pension Calculations,” if all public employees were given social security and medicare in their 60s, instead of pension benefits far more generous that begin in their 50s, California would have NO budget deficit. This reform would also encourage more crossover between the public and private sector, since public sector employees would no longer be slaves to their pensions. And by putting all workers in the same boat, much needed reforms to social security and medicare would be more likely, since public sector employees would be far less likely to be indifferent to the challenges the rest of us face in our retirements.

The analysis we’ve presented on the interactive spreadsheet will allow any viewer to input their own assumptions. We think the default input assumptions, which are highlighted in yellow, are extremely conservative. There are two columns, which presumably represent two organizations, one in the private sector (left), and one in the public sector (right). Here are the assumptions – and you can enter any you like:

Age entering workforce: 20 for both
Average salary per year: Private – $30K, Public – $35K
Age at retirement: Private – 65, Public – 60
Life expectancy: 80 for both
Retirement payment per month: Private – $1K, Public – $2K
Size of workforce (incl. city & county): 3.0 million for both

Using the calculator, staying in constant dollars throughout, the cost per year to fund retirement benefits for the public entity is $36 billion per year, compared to $12 billion per year for the private entity. We would submit that every assumption in this calculation, were it to be a more accurate reflection of reality, would inflate the differential referenced here. Moreover nothing in this model calculates the staggering differential between the public and private worker when considering the costs of the generous vacationm, personal, “9-80,” overtime, “comp.,” sick, and sabbatical time granted public employees, nor the cost of hiring and promoting according to quotas, regulations, incentives, and other criteria that has nothing to do with merit and competance. Bottom line: If public employees got the same deal that private employees get, on average, the state of California would save $24 billion per year – and we think that number is grossly understated.

The astute critic may counter that using constant dollars is a radically reductive assumption, rendering these calculations meaningless. We disagree. Of course the time value of money, inflation, and the earnings potential of funds is relevant, but it should normalize since both pools of workers exist in the same society, the same place and time. If they don’t normalize, they should. And if they are all applied, the result will probably not change much. Perhaps we’ll test our new online spreadsheet converter program, and post some of our more sophisticated models. And consider this – California’s state retirement systems are making assumptions regarding the real return on their funds that are based on an unprecedented boom in the value of global markets – and this may or may not be a sustained long boom. And if it is, all workers should all share in it.

This is the ideal that unions should hold most dear. All worker’s rights matter. Every Californian’s health and retirement security should matter – and the first step is to give every Californian the same set of challenges. California can solve their budget deficit overnight – even modest pension benefit reductions would free up $10+ billion per year in much needed funds. As Californians grapple with their huge 2008 budget deficit, why isn’t there even one word being spoken in the press about reforming the financially unsustainable public employee pensions? When will someone stand up for private workers? It might make us all more likely to trust our government, more likely to embrace new projects and programs. As long as taxpayers fund retirement benefits for public employees worth many times what private sector workers will receive, no agenda or cause that increases taxes or fees should have credibility.

4 Responses to “California's Deficit”
  1. Daniel says:

    What about private fund managers, private CEOs, private Managers reaping millions and underpaying their private staff?

    That’s free market for you.

    Why not the other way around? Let’s say, private workers getting the same benefits as public wokers. Wouldn’t everyone be uch happier?

  2. Ed Ring says:

    Daniel – it’s easy to demonize the free market, but the private sector taxes are what funds public entities. And while there are a few thousand arguably overpaid top executives in the private sector in California (for example), there are 16 million private sector workers in California. It is the 16 million we’re concerned about, and lowering salaries and benefits for a relative handful of overpaid private sector top executives would only be a drop in the bucket towards making the 16 million better off.

    What you have to ask yourself is what level of taxpayer funded health and retirement security would California’s economy support for 20 million people, which would be the 16 million private sector workers and the 3.7 million public sector workers? Figure that out, calibrate it somehow in a manner similar to social security where how much you make and how long you work influences the level of your benefit – and then give every worker in California the same deal.

    That’s all I’m trying to advocate. I agree with you on principle, but I don’t think it is economically feasible to give 20 million people a deal as sweet as the privileged public sector workers currently enjoy.

    Remember also the private sector must not only pay taxes to support the public sector, they also must compete on the global market. The fact that the public sector is immune from the forces of globalization should be cause for their unions to be strictly regulated, instead of the current situation, where they dominate election financing and exert nearly absolute control over state, county and municipal governments.

  3. JohnB says:

    As an advocate of the private sector I believe in the primacy of free market bargaining, and the importance of respecting the spirit of contracts. The public authorities put jobs on the marketplace to attract employees. Both parties made decisions based on the total financial package. Both sides – and the public they serve – have enjoyed a commensurate level of service. To break that contract, negating the millions of free market bargains that were struck in the employment market and making worthless the concept that free agents can take decisions based on contractual offers in which they can expect those contracts to be upheld is anti-enterprise, anti-freedom and nothing more than socialist state planning.

  1. Employees Retirement System…

    Thanks for this post!…

Leave a Reply

You must be logged in to post a comment.