Wednesday, June 29, 2011

Public Employee Pension Benefits Need to be Addressed Now

Almost 40% of public employees belong to unions. For comparative purposes, only 7% of the employees working in the private sector are union members.

Public employee unions are too strong and represent a huge fiscal problem for the well-being of many large and small cities nationwide.

By looking at just the retirement portion of the compensation program for public employees, we can shed some light on what is rapidly becoming perhaps the single most important issue facing American cities today. It's important to all of us as American citizens, because whether we belong to a union or not, and whether we work in the public or private sector, we're all in this together.

Unlike governments, private sector businesses have been adopting defined contribution plans in increasing numbers. Governments continue to offer pension plans while struggling with a multitude of other financing issues. This single issue goes way beyond defined benefit vs. defined contribution choices concerning employee retirement benefits. It strikes at the very core of the public versus private sector "system" of economics.

Public employee unions today are much stronger than unions representing the employees of private businesses. That's changed over the years as worldwide competition has heavily impacted private companies while, of course, that's not been the case with our cities. As a result, pension plans for the private sector have been disappearing even while they remain omnipresent in the public sector.

The pension benefits promised today by taxpayer representatives won't come due until well in the future. As such, their true cost to future generations of taxpayers won't be known for many years. On the other hand, a particular private business may not exist several decades from now. But if it does, it will be because it has done what is necessary to remain competitive.

It's reasonable to ask why the taxpayer of today makes promises regarding the highly uncertain cost of tomorrow's benefits. Those future promised benefits for today's workforce, since in most instances they aren't being adequately prefunded, will of necessity be funded by the taxpayers of the distant future.

Here's my simple question: If we want to provide the benefits for tomorrow, why can't we fund them today? And here's my simple answer: Because that would raise taxes today, so let's stick the taxpayer of the future with the bill.

Doesn't seem fair. Not at all.

So let's briefly summarize what makes businesses and governments act so differently when it comes to pensions and 401k/IRAs.

(1) Businesses and governments have totally different purposes. Peter Drucker, management guru, stated that the purpose of business is simply to create and keep a customer.

In stating the purpose of government, John Locke (whose views served as the foundation for our Declaration of Independence) believed that it is simply to protect its citizens from each other and provide for the common defense.

(2) Businesses and governments are financed quite differently. Businesses are financed by "at risk" investors, both owners and lenders. Governments are financed by taxpayers (and all too often by lenders as well).

(3) Businesses have to compete successfully with other businesses to stay in existence whereas governments are basically monopolistic creatures and have no existential issues.

Summary of the Differences

The customers sought by businesses have freedom of choice concerning whether to buy from a particular business, another and different business or to elect not to buy at all. Investors put their money at risk with the hope of receiving a satisfactory return, or profit, on their investment. By selling their stake, investors can withdraw their money from a particular business investment. Earning a satisfactory profit for investors is therefore the cost of staying in business, and this staying power is only achieved by satisfying customers and investors alike.

Governments ----- Governmental entities fund their operations through taxes, fees and sometimes borrowings. When they occasionally do "compete" with the private sector, they do so as a favored and protected monopoly, and thereby are in an advantaged position relative to their private "competitors".

Recipients of government services, unlike customers of private businesses, are generally not free to choose when "purchasing" from a monopolistic government agency. The bureaucrat knows this and so does the citizen taxpayer. We're not treated like customers who have choices, because we don't have choices.

Compensation Differences

Compensation, including benefits, is another area of difference between businesses and governments. If businesses commit to future employee benefits which they cannot fulfill, they either have to convince employees to accept less or else go bankrupt, in which case all employees will lose their jobs. The firms will then cease to exist, and the investors will lose their investment.

When a government entity makes promises concerning benefits for the future which it can't fulfill, however, it won't go broke. And it won't cease to exist. The government's power to tax its future citizens puts the public employee union representatives in an apparent "no lose" situation while simultaneously putting the future taxpayer in a "no win" position.

That's the fundamental reason why the responsibilities of public employee union officials are different in kind from private sector union officials. The public sector representatives have lots of advantages with respect to negotiating power. In the private sector, however, the company can either lose its customers, investors or both if its labor or other costs get out of hand. Thus, the unions, while not powerless, have considerably less power with private companies than unions have in the public sector.

To reiterate, staying power is not a problem in the public sector. Whereas the private company may enter bankruptcy and go and out of business, that's not going to happen to a city. Due to its taxing power, the government won't cease to exist. The taxpayer makes all the difference. And that taxpayer pays.

It's as simple as that. Unions, employees and investors all know the different games being played. It's time the taxpayers wise up, too.

Hopefully, this brief public to private sector comparison will help clarify things. Regrettably, far too many American cities are facing huge financial issues today, in large part because of the pension benefits they've granted to public employees over the years. For a sobering analysis of the issue as it pertains to cities such as Providence, New Haven, Madison, Chicago, Detroit, New York and others, please read The Local Government Pension Squeeze. And lest we forget, the identical problem exists in England and elsewhere, too (Britain's Classroom Arithmetic).

In sum, businesses must control costs, get and keep customers, and earn a satisfactory profit for their "at risk" investors or they will go out of business. But governments are a totally different story. Unfortunately.

Thanks. Bob.

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