Pensions Gone Wild
In many states across the country, public sector pensions are beginning to cripple state budgets and threaten the welfare of residents forced to pay for the mistakes of past administrators and elected officials. The roots of the crisis go back decades to when trade unions―representing everyone from sanitation workers to teachers―were able to hold municipalities and states hostage for unreasonable benefits whose ultimate payouts (and cost) would continue long after the retirement of state officials negotiating them at the time.
How do we define unreasonable? Take the case of city workers in San Diego. According to Fortune, an average city worker earning $50,000 a year is eligible to collect a lump sum of $305,000 at retirement. And that’s on top of a pension for life equivalent to 75% of their salary that increases by 2% a year.
Or take the case of public school teachers in Illinois. In Illinois, local districts must fund the majority of educational expenses (including teachers’ salaries). But the state is responsible for pension payments (which are based on approximately 80% of the average of an educator’s last three years in the workforce). In practice, this has resulted in many districts inflating teachers’ salaries as rewards when they approach retirement, forcing the state to pay the pension bill. Fortune sites an example of a trigonometry teacher in suburban Chicago whose salary “vaulted from “$93,000 to $173,000 over the last four years” before his retirement.
When Illinois lawmakers introduced legislation to curtail these end-of-career salary hikes, the teacher’s union mobilized and went into action to defend their brethren. The result? Only non-unionized superintendents would see the salary “spiking” end. The bill to halt the practice for teachers was soundly defeated thanks to union handouts and campaign contribution payoffs. The Illinois Federation of Teachers defends the practice to this date, and suggests that as “more people are concentrated in positions that have no pensions systems at all … hopefully some day they’ll all join unions.”
Only a few decades ago, a similar logic bankrupted the steel sector—and it’s close to bankrupting the automotive and airline sectors today. The pensioners in the steel cases, however, were forced to deal with more reasonable benefits as courts defined them on a case-by-case basis. But in the public sector, bankruptcy is not an option to renegotiate pensions―state and federal law forces states to honor pension agreements they made in the past.
The only way to address the problem is to confront the current situation as contracts with the unions representing state workers expire. In many cases, this will require fundamentally reworking how pensions—and salaries—are funded. It’s a well known economic fact that the majority of workers discount the value of “out-year” benefits. By lowering pension payouts and increasing salaries to a non-unionized work force earlier in employee’s careers, states and municipalities could attract better candidates who would otherwise only consider jobs in the private sector, which trade higher salaries for reduced retirement benefits. In the case of school teachers in Illinois, this would require closer collaboration between the state and local districts on funding throughout the lifecycle of an educator (perhaps changing from a system funded almost entirely on property taxes to one based on a hybrid of greater state funds along with local funds.
Given the entrenchment of the unions, it’s unlikely this will happen anytime soon. Ultimately, it might require voting with our wallets. Barring the election of more rationale officials willing to take on the unreasonable pensions which trade unions dictated in the past, the option is to pack your bags and bring your dollars (and primary residence) to slates that won’t be forced to significantly raise taxes to fund past―and current―pension mistakes.