Public sector employees are largely covered by pension plans promising retirement benefits that are not available to most private sector employees. All too often these public employee plans are woefully underfunded as well.
In contrast to the public sector norm, where the retiree's pension benefits are "guaranteed," 401(k)s are the usual situation for private sector employees, and the risk of receiving an inadequate resulting retirement benefit rests entirely with the individual worker. It's a simple matter of government dependence versus self reliance for the public and private sector plan beneficiaries, respectively.
Pensions: America's Great Divide relates an interesting story about the differing emotions of those employees who are covered by public sector pension plans in comparison to those private sector workers whose retirement assets are usually invested in 401(k) plans:
"As millions of boomers enter, or get close to retirement, concern grows on whether they’ll have enough retirement income.
In a time of recession, rising taxes, increased deficits and depleted retirement accounts, many people will struggle to fund the financial situation they need to have to enjoy their later years.
Whether this is achieved by privately funded retirement accounts or pension based promises, Americans need to have a solution to fund their needed retirement income.
A recent article I posted on this site about "Pension Envy" discussed the rift that exists between Americans who plan on funding their retirement income needs with promised public based pensions and those who depend upon their privately funded investment accounts, subject to the lack of promises by the markets and their own investment abilities.
After receiving over 100 very emotional comments and fiery debates related to the article, it's clear to me that this is a topic that is not only timely and emotional, but is one that is potentially dividing this country. . . .
A Bloomberg article by Amity Shlaes that ran one week before the last Presidential election discussed this reality. . . . Interestingly enough, this article stated the following, " The tax gap isn't the deepest divide in America. The deepest gap is the pension divide, between those few who have a guaranteed cushion in the form of defined benefit pensions, which promise a fixed annuity at retirement, and those who don't. "
The article goes on to ominously state, "The reality is that a big public pension crash, which will eventually occur no matter who wins the election, will make clear that the government employees won't get what is promised. It will reveal the truth: We are all in the same boat fiscally and even financially.". . .
The Pew Center provided a report in June of 2012 called 'The Widening Gap Update" that showed a $1.38 trillion gap between the assets of states and their obligation for public sector retirement benefits in fiscal year 2010 (this includes pension promises and retiree health care). The report states, " states continue to lose ground in their efforts to cover the long-term costs of their employees' pensions and retiree health care.". . .
The study does report that states are acting on the issue; " states have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward, but continued fiscal discipline and additional reforms will be needed to put states on a firm footing. "
These solutions include the reality that " nearly every state has reduced pension benefits or increased employee contributions in the last three years. "
But will it be enough? What impact will it have on those who will be entering the retirement landscape from the public sector with reduced benefits? Or for those in the private sector who already see lowered retirement account values and the resulting lengthening of their employment."
The point is simple. Pensions with guarantees that have benefits equal to or greater than 401(k) plan benefits may be better but they're also also unaffordable.
The whole idea of a guaranteed benefit being greater than the variable offering is directly opposed to the simple and underlying principle of investing that assuming greater risk is aligned with the potential of receiving a greater return on that investment. That's also only common sense applied.
Because if it were otherwise, only a complete fool would invest in something with a higher risk accompanied by the probability of a lower reward for the risk assumed.
Yet today that's exactly where too many private sector employees find themselves in comparison with their public sector counterparts. Private sector taxpayers with unguaranteed and less lucrative retirement benefits are funding the public sector employees' guaranteed and more generous retirement benefits.
While their taxes go to guarantee the guaranteed pension benefits of public employees, their own jobs and retirement benefits are at much greater risk than those assumed by their public sector counterparts at no probable greater reward.
Accordingly, something has to give.
The plain fact is that the future will see higher contributions and lower benefits for public employees, accompanied by less job security and lower compensation compared to that earned by private sector workers for comparable work.
And the public sector union officials and "progressive" politicians won't be able to stop this from happening.
And finally, the reason that public sector remuneration will decrease instead of private sector compensation increasing is due to the increasingly global nature of private sector competition and its huge impact on domestic companies and their employees. Unlike the public sector where monopoly prevails, private sector companies operate in a competitive global marketplace where customers rule.
That needs to start happening in the public arena as well.
That's my simple take.