Public Sector Pensions and The Fall of the Western World

Pensions are a boring subject.  If I write about war, my articles get thousands of views and dozens of comments.  If I write about public sector pensions bankrupting the United States, a few hundred people might look at the article and no one, except the occasional irate first responder, ever comments.

Pensions might be boring because we are all conflicted on the subject.  I want my pension.  I just don’t want to pay for someone else’s.  Somewhere deep down inside I know that there is a contradiction, so cognitive dissonance squelches my anger.  No anger, no political will.

But then my brain starts to work again and I feel compelled like Cassandra to rail against our impending doom.

There is a simple solution to public sector pensions.  Limit them to median annual income.  That is how the New Deal creators of Social Security thought about the issue.  They pegged social security at about ½ of median income.  In the 1970’s, Congress passed ERISA, a law protecting private pensions, mainly in the case of insolvency.  ERISA only protected private defined benefit pensions up to the median income level or about $50,000 today.  These are sensible limits.  They protect retirees from poverty.  Put a safety net under the elderly.  They are fair.

But sensible limits in public sector pensions have long been passed.  The list of abuse is long and hardly needs repeating: school superintendents getting $200,000 per year, teachers in excess of  $100,000 per year, police chiefs raking in $150,000 or more, civil servants padding their pensions with overtime, not to mention the perks given to Congresspersons, Senators, Governors, Supreme Court Justices and Federal Reserve employees.

As the Secretary General of NATO recently warned “NATO is in danger of becoming the best armed pension plan in the world”.  More and more the money is being diverted to pension promises and away from defense.

In the public sector, defined benefit pensions in excess of median income are simply not affordable, especially when the Federal Reserve cuts the risk-free interest rate to 2

The Governor of New York, Andrew Cuomo, recently signed a new pension scheme for public employees called Tier 6.  It was a noble and heroic effort to slow down the rate of local tax increases, but it didn’t go far enough.  Pension costs are the fasting growing component of local budgets in New York State.  Tier 6 only applies to new employees so it won’t kick in quickly enough to prevent to layoffs of thousands and thousands of public employees.  Already in Dobbs Ferry where I live, the Village Government has cut headcount by 30% in the last five years.  All the fat is gone; we are starting to cut muscle.

What America needs now is real pension reform.  It is not clear who should lead this charge.  It is not clear that anyone will, but defined benefits need be limited to median income if government is to remain solvent. 

Public sector pensions need to be thought of as a safety net, not a golden parachute.  Anything above the safety net should be provided by pay-as-you-go schemes such as matching contributions to a defined contribution plan like a 401K.  

Limiting defined pension benefits to median income is a way to save America from fiscal disaster.  Unfortunately, in a democracy, it may take insolvency for true pension reform to be enacted.

If U.S. Bankruptcy Judge Christopher Klein in charge of the Stockton, California insolvency reads this article, please consider spreading the pain, a la the GM bankruptcy.  Reduce public pensions down to the ERISA guarantee and impose the rest of the haircut on the bondholders.