Wednesday, December 30, 2015

Pension Promises Made and Kept in the Public Sector ... Made by Whom and Kept at Whose Expense?

Government employees make promises to other government employees, and future taxpayers are expected, if not required, to pay to keep those promises.

Of course, the government employees making those promises purport to represent those future taxpayers, so in essence the future taxpayers are the ones making those promises. Or are they?

And what happens when the purported beneficiaries of those promises are necessarily shortchanged as a result of the unaffordable and previously undisclosed cost involved in keeping those promises far into the future?

And what happens when public sector union leaders then insist that some government employees, aka union members, are in fact 'more equal' than the non-union citizens, aka taxpayers and the school kids?

Those questions are being asked all across America regarding future taxpayers keeping the promises made by past government officials with respect to paying for public sector teachers' and other employees' pensions at the expense of fully meeting other government priorities and obligations. Yes, the rubber is meeting the road today in many states and municipalities as the cost of promises made in the past now are proving themselves to be unaffordable in the here and now.

States' Pension Woes Split Democrats and Union Allies has this to say about the developing crisis in choosing between raising taxes to fund public sector retirement benefits or not raising taxes and choosing instead to meet the needs of current education and other government priorities:

"A $1 trillion U.S. pension gap is dividing two longtime allies: Democrats and unions.

Left-leaning politicians from Rhode Island to California are increasingly supporting more aggressive overhauls of government pension benefits despite opposition from labor officials, traditionally one of the Democratic Party’s biggest policy and electoral supporters.

The erosion of Democratic backing for conventional retirement benefits prized by teachers, firefighters and police officers is a sign of how strained government budgets are as obligations for 24 million public workers and retirees continue to mount.

The latest clash is unfolding in Pennsylvania, where Democratic Gov. Tom Wolf has been seeking to end a six-month budget impasse with a Republican-controlled Legislature by agreeing to approve retirement cuts for new state hires and current workers. The Keystone State has $50 billion in unfunded pension obligations, one of the deepest retirement holes in the country. . . .

A spokesman for Mr. Wolf said the governor understands that some people would be upset with the pension cuts, but his priority has been boosting education spending. . . .

The amount states and local governments are paying each year to fund retirement systems has risen to 4% of annual spending, up from 2.3% in 2002, according to U.S. Census data. Meanwhile, large retirement systems now have just three-quarters of the assets they need to fund future obligations, according to consultant Milliman Inc., leaving a gap of $1 trillion.

Democrats rarely tried to roll back pensions before 2008, according to politicians and pension officials. But as deficits surged because of deep investment losses in the wake of the financial crisis and chronic underfunding of retirement plans, Democrats said they had little choice but to revamp benefits, leading to conflicts with what has usually been a large and loyal bloc of voters....

Pennsylvania’s pension problems date at least to the early part of the last decade, when unions won a boost in benefits that was followed by stretches of economic weakness and poor investment returns. The plans also suffered from chronic underfunding. State lawmakers increased retirement ages and changed funding formulas in 2010, but the gap widened.

The state is projected to spend $2.4 billion out of its general fund on pensions this year, up 43% from $1.7 billion last year, according to a December report by the state’s independent fiscal office. The cost is forecast to hit $3.5 billion, or more than 10% of the state’s roughly $31 billion budget, by 2020. . . .

There are already signs that some Democrats who take a harder line on pensions can survive politically. Pension-cutting Democrats can still come off as more friend than foe to union officials, because Republicans often target deeper benefit cuts.

Former Rhode Island Treasurer Gina Raimondo won election as governor in 2014 after battling with unions on a pension overhaul.

Ms. Raimondo ultimately reached a settlement with workers this year that locked in $4 billion in savings. The cuts included shifting some current workers and new hires onto plans that include a 401(k)-style account, plus reducing the cost-of-living adjustments for retirees.

“There’s still a core group that’s angry, and in many ways I understand why they’re angry,” Ms. Raimondo said. “I tell them, ‘Don’t be mad at me. Be mad at people who made promises that were unaffordable.’ ”"

Summing Up

Making choices is an essential part of economics as well as governing.

When making choices is deferred far into the future, the present non-choosers are often able to make promises without having a clear path to keeping those promises.

Politicians make present promises about future benefits in the here and now.

Later the next batch of politicians will be called upon to decide on the then and there priorities.

One dollar spent on retirement for government employees can't be spent on educating kids.

Either more dollars must be raised through additional taxation or the promised benefits must be curtailed.

It's really that simple.

That's my take.

Thanks. Bob.

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