Nasty Battle Looms Over Public Sector Pensions

Aug. 24, 2010 - PRLog -- By David Caploe PhD, Chief Political Economist Watch.com

Of the many fault lines that the Black September 2008 crisis and its aftermath have exposed in the “developed” world,

perhaps the most difficult is the relation between the public and public sector employees.

Many of us can immediately recall encounters with “public servants”

in which we felt more like slaves, let alone servants or masters, as Depeche Mode might say.

So it’s with no small degree of anger that many people react to

the simultaneous exposure of both their own vulnerability to unemployment and disappearing pensions,

and the fact that not only are public employees basically life-tenured,

but are also often granted generous pensions

that represent no small measure of the so-called sovereign debt load being borne by governments,

the problems with which have called into being the austerity measures that have hit entire societies so hard,

as we have pointed out with regard to several, most notably Ireland.

To be sure, those pensions are hardly the only component of sovereign debt.

But the combination of the bad experience many people have had with public employees AND

the fact that they are insured both life-time employment

plus relatively cushy pensions that have not technically gone up in smoke,

as with Enron or any other number of private employers,

but are being paid for by the very same taxpayers who feel they have been insulted by public sector workers,

means the battle over public sector pensions is likely to be an ugly one.

Indeed, some go so far as to characterize it as a “class war.”

The seem-to-be haves are retirees who were once state or municipal workers.

Their seemingly guaranteed and monthly pension benefits appear to be breaking budgets nationwide.

The seem-to-be-have-nots are taxpayers who don’t have generous pensions.

Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed.

And soon, many of those people will be paying higher taxes or getting fewer state services

as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion.

The figure comes from a study by the Pew Center on the States that came out in February.

Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers –

in the way of retiree pension, health care and other benefits –

and the money they currently had to pay for it all.

And some economists – there they are again – say Pew is too conservative,

and the problem is in fact two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges:

Given how wrong past pension projections were,

who should pay to fill the 13-figure financing gap?

But it’s even more complicated than that.

Why ???

Because the American “dominant myth” [ see Lectures 8 – 13 ]

that private is always better than public

meant the PUBLIC pension funds that were supposed to cover these pensions

invested almost all their money in PRIVATE companies
.

And, unfortunately, as we now know, MANY of these PRIVATE companies –

on whom the PUBLIC employees were depending, to generate the money on which they were going to retire –

were, shall we say, not too well run in the first place, despite the assurances of the credit rating agencies,  

and went under during the run-up to, and aftermath of, Black September 2008.

In that sense, the public pension funds were, in fact, dependent on what happened in the private sector.

And there’s another significant aspect here that most Americans, let alone others, don’t know:

Public employees are forbidden BY LAW from paying into Social Security –

which means the pensions they receive from the government are

the ONLY legally insured retirement money to which they have access.

So what appears to be shaping up is one of those tragic battles of right vs. right:

public employees who were dependent on private companies as the ONLY sources of

money to insure their retirement at a previously agreed-upon rate

vs. a public whose own economic present and futures are in grave doubt

and whose experience with at least some public servants has often been less than pleasant.

In this context, consider what’s going on in Colorado —

and what is likely to unfold in other states and municipalities around the country.

Earlier this year, a bipartisan coalition of state legislators passed a pension overhaul bill.

Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This was apparently the first time that state legislators had forced current retirees to share the pain.

In Colorado, though, some retirees and those eligible to retire found this solution

a violation of what they thought were legally-insured promises.

So they sued the state to keep all of the annual cost-of-living increases

they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change.

To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund,

the answer is pretty simple.

“If something didn’t change, we would have run out of money in the foreseeable future,” he said.

“So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher,

who is one of the lead plaintiffs in the case against the state,

asks taxpayers in Colorado and elsewhere to consider an ethical question:

Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades.

And along the way, state employees made big decisions, and built lifelong financial plans,

based on retiring with a full pension that was promised to them in a contract

they say has the force of the state and federal constitutions standing behind it.

To them it is deferred compensation,

and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe

he should be responsible for past pension underfunding

and the foolish risks that pension managers made with his money long after he retired in 2003 ...

To read more at http://www.economywatch.com’, go to:  http://www.economywatch.com/economy-business-and-finance-...

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