Saturday, August 6, 2011

Disruptive Change and R.I. Public Worker Pensions

Recently we discussed the public employee pension dilemma in Cedar Falls, Rhode Island. It appears that the Cedar Falls issues aren't peculiar to that community. In fact, the R.I. problems are not restricted to Rhode Island either. They're very much a major part of our overall American debt and deficits problem.

But R.I. is a special case, too. Many public workers who have retired are now being paid more than they were paid when working. In addition, there are more retirees receiving payments now than there are current employees making payments into the state pension fund. And on top of that, less than 50% of the funds needed to pay retiree benefits are in place and properly funded. The rest of the funds to pay current retirees will have to come from current workers. This obviously is a formula for disaster unless disruptive change occurs and the state adopts the necessary financial changes to keep the plan afloat.

{Along these lines, disruptive as opposed to incremental change is ahead for many of our other public workers, too, along with many other segments of our society as well. But we'll focus on the state pensions in Rhode Island herein.}

Softer Approach on Pension Problems describes the hard working and hopeful state treasurer's efforts to familiarize the R.I. public workers with the dilemma facing them and their state with respect to paying future pension benefits to state workers.

Nevertheless, one retired Rhode Island worker is skeptical, to say the least. She said this after listening to the state treasurer's softer fact based approach, "It's us against them: retired workers versus current workers."

To which I'll simply reply that if it's really a contest, the retired workers have won. Game over. The first Ponzi payees - er - retirees always win compared to the later ones. And in this case, current retirees didn't fund even one half of their pension obligations to pay their benefits. As a result, current state workers are now forced to fund those unfunded old obligations as well as whatever pensions can be paid to the current workers with remaining monies, if any, whenever they retire. It's a double whammy of sorts unless, of course, the current workers intend to stick their kids with the bill just as the current retirees have done to them. Ponzi, anyone?

So what kind of change is needed? Disruptive, for sure.

Simply put, disruptive or discontinuous change is required when tweaking won't do the job. Clearly, tweaking won't supply those funds which were not provided adequately during the past several decades. Rhode Island, like other states such as Illinois, grossly underprovided for its pension obligations for many years (similar to the social security fund nationally). As a result, today two thirds of each dollar contributed goes to make up for the prior generation's shortfall and not to future pension funding for current workers. Yes, that's correct. Today's workers are paying the money which wasn't paid by prior workers. And if that's not bad enough, today's workers are even fewer than the number of retirees they're supporting.

The SEIU public employee union head said this, "I want to minimize pain to everyone. But it comes down to fairness." Let's examine that union leader's statement in view of the us (retiree) versus them (current worker) comment earlier.

The union official wishes to minimize pain to everyone and achieve fairness for all. That's nice. My question to him is simply this: To whom and for whom?

In looking to fairness and what ought to be, in far too many situations we adopt a "believing is seeing" stance, and our beliefs tell us what in turn we will see.

Therefore, in seeking the pain and fairness question's answer, recognizing the difference between POSITIVE and NORMATIVE economics is instructive. Positive economics deals with facts and therefore addresses "what is" or "verifiable" questions. Positive economics is an analysis that is limited to statements that are verifiable. Positive statements can be proven true or false. An "if-then" prediction, for example. If A happens, B follows. The conclusion is testable. The state treasurer is using positive economics to share the issue with workers and retirees when she says that the system is unsustainable today, and that basic math proves the case. Whether that statement is true or not, at least it's testable.

On the other hand, the union leader uses normative economics by adopting a subjective rather than objective approach. Normative economics is based on what "should be" or making "value judgments" about what is deemed to be good, bad, fair, should be, ought to be and such.
Depending upon whose rose colored glasses are being used, the same facts are viewed differently by different people in normative economics.

Thus, that returns us to the us versus them view of the world. We'll talk about this positive compared to normative world view as we go along, but for now, Rhode Island is helpful to bring the picture into better focus.

I wonder how clearly the state treasurer, the union leader, the retiree and the current worker will see things. And more importantly, will they see the same things the same way? That's going to be determinative if they are to bring about the required disruptive changes to the state's pension plan in an informed and adult manner.

As a broader issue, we have lots of positive economic issues continuously clouded by our normative views of the world. Politics is a great example of that. But no matter what we believe should be, we need to first know what the reality is. Thus, we need to know about the positive economics of the problems we're facing. Reality won't budge, so we may as well become familiar with it at the outset of our problem solving approach.

Without a handle on that fact based reality, we'll not be able to make an informed choice on what to do about improving our reality. It is what it is.

Only thereafter can we in a normative manner decide who ought to get what and who should pay what, and know that we've all tried our best to promote the "general welfare" while doing so.

Thanks. Bob.

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