A Pension for Reform

Unfunded pensions and generous earlier-than-most retirements, often the product of years of collective bargaining and powerful unions exercising their financial clout with campaign contributions, are slamming state and local budgets, in many cases dragging these regional governments to huge deficits and even possible insolvency. The role of unions has changed sharply over the years, from needing protection from New Deal legislation just to be able to organize to gather economic strength particularly in the post-WWII years to a profoundly new dynamic of union membership today. “The percentage of workers belonging to a union (or "density") in the United States peaked in 1954 at almost 35% and the total number of union members peaked in 1979 at an estimated 21.0 million. Membership has declined since (currently 14.8 million and 12% of the labor force). Private sector union membership then began a steady decline that continues into the 2010s, but the membership of public sector unions grew steadily (now 37%).” Wikipedia.

Private sector jobs are often in smaller, more segmented companies, and even when there are just a few major suppliers in large industries – like carmakers – the direct pressure from failing economic assumptions and macro-economic pressures, reorganization and bankruptcy are easier tools to avoid collective bargaining agreements that are no longer economically sustainable. Additionally, the very structure of most private pensions has endured a long transition from “defined benefit” plans (where you get a fixed retirement check based on the level of your employment and years of service, sometimes with cost of living raises) to “defined contribution” plans (where what is in your retirement account is what you have to fund your retirement). Most governmental pensions are still promising those fixed benefits, even though the decimated economy is no longer able to produce the tax revenues to meet those commitments.

Uniformed services at a local level, mostly police and fire, often have the most generous pensions in the mix, frequently providing very early retirement with higher levels of post-retirement benefits. Politicians found supporting these government workers are good way to generate neighborhood sympathies and obvious support at the ballot box. Civil service workers point to their stepping out of pursuing careers in the private sector, which through most of the late twentieth century paid significantly more than the government for comparable skill-sets, often pointing to the stronger benefit packages – from solid healthcare, job security and strong retirement packages – to justify that choice. Today, an awfully large segment of workers in the private sector (mixed with a lot of folks who have lost their jobs) look on enviously at that same job security and powerful benefit packages with envy, wondering why they have to support these government workers to a level that they themselves will never enjoy again.

The battles over union benefits within government are producing results that send chills down the backs of union organizers all over the United States. The Scott Walker (pictured above) recall election in Wisconsin pitted a strong anti-union governor whose goal was clearly to unravel such benefit packages against an aggregation of union power struggling for their existence. Massive funding from all over the United States poured into this significant local battle, ultimately keeping this anti-labor governor in office. The June 5^th election produced increasing evidence of voter dissatisfaction with these perceived overly-generous civil service benefits packages that may no longer be affordable, although critics point out that it was simply another case of victory through SuperPac spending: “Walker was bolstered by wealthy out-of-state donors who gave as much as $500,000 each under state rules that allow incumbents to ignore contribution limits in a recall election. He raised $30.5 million, while his Democratic challenger, Milwaukee Mayor Tom Barrett, raised $3.9 million, according to data compiled by the Wisconsin Democracy Campaign.” Washington Post, June 6^th.

In California, where labor unions more clout, there is increasing voter frustration with these benefits as well: “In both San Diego and San Jose, voters appeared to overwhelmingly approve ballot initiatives designed to help balance ailing municipal budgets by cutting retirement benefits for city workers… Around 70 percent of San Jose voters favored the pension reform measure…. In San Diego, 67 percent had supported a similar pension reform measure...” New York Times, June 6^th. Whether these cuts can be implemented will be an issue for the courts. The message is rolling out across the land with similar sentiments defeating pro-union support for protecting these civil service benefits.

Increasingly, civil servants cry foul, saying the rules cannot be changed decades after then believed they were sacrificing higher payer in exchange for these benefits, and indeed, that notion of legally “vested benefits” seems to be the most difficult hurdle pension reformers face in their efforts to reduce the cost of government. “Residents of San Diego and San Jose … cut not just the benefits of future hires, but also those of current city workers, whose pensions generally have much stronger legal protections than those of private-sector workers… Unions in both cities vowed to block the cuts in court, but the ease with which the measures passed is expected to embolden other financially strained cities and states to follow their lead.” NY Times.

Unlike the federal government, which can simply increase the deficit to continue such benefits, states just run out of money and have to borrow directly from the marketplace or raise taxes at a time when most people have less money because of the economy. New hires in local government often face lower benefits than older workers, but in this impaired financial universe, a job is still a job. The bigger question is precisely how the United States is going to afford the huge numbers of aging Baby Boomers, many of whom have lost their pensions in the economic collapse, who are slowly rolling into retirement… some by choice… and many by the pressure of reality. Where is the money coming from?

The statistics on underfunded state and municipal pensions are nothing short of horrific, and the relevant pension managers are increasingly eschewing the safer investments to roll the dice on so-called “alternative investments” (described below) – which have much higher yields in success but which likewise have much bigger loss potential in failure: “For years, states and localities have scrimped on pension funds, which are now alarmingly short of the money needed to pay future claims. Nationwide, these deficits are estimated to total $1 trillion to $3 trillion.

“Because of that gap, many funds have been scouring the more exotic corners of Wall Street, seeking the returns needed to keep promises to retirees. By the end of 2011, retirement systems with at least $1 billion in assets had raised their stake in real estate, private equity and hedge funds to 18.3 percent, from 10.7 percent in 2007, according to the Wilshire Trust Universe Comparison Service.” NY Times, June 9^th. One way or another, there are a whole lot of chickens looking for a place to roost.

I’m Peter Dekom, and in the battle over the future of retirement and healthcare benefits, it’s getting ugly out there.