Solving The Pension Problem
Wisconsin looks like Greece. The recipients of government largess, upon threat of losing it, take to the streets in protest. Their employers, the various schools systems, do not tell them to take off, their union bosses do, and so they lay out of work to protest.
As the failure of major public pension funds looms on the horizon, talk is of how to resolve the issue. Most speak of treating of symptoms and not the problem. Perhaps an explanation of what the problem is would help. The problem – underfunding – is so simplistic that it seems obvious. But if it were obvious, like potholes in the road are, perhaps something would be done. This is because the term underfunding, being simplistic, avoids examination of the problem and so makes avoidance of the problem an easy choice.
Pensions, retirement plans and Social Security are understood to be funds available for the payment to workers, or their beneficiaries, for the worker’s withdrawal from the workforce. This withdrawal does not mean a reduction in, nor is it associated with, the retiree’s expense, but means only they will leave the workforce and be paid a predetermined amount during said withdrawal or retirement. The question is where does the money come from? More accurately, what does this money the retirees expect to be paid represent? This is the critical question and it is the one which must be addressed if we are to repair the dysfunction of current public pension plans and move into a fiscally reasonable future.
Payment for retirees is of two sorts. It is either money set aside during the retiree’s working career, or it is money taken from those still working after the retiree withdraws from the workforce. Typically public employee pension funds are written as part of an employee’s benefit package to enable the state to hire people at lower wages than they would expect in private business. This is fine, but in order to properly fund those retirement benefits someone must do the work that the promised pension to the retiree represents. This is the crux of the issue. If a retiree is led to expect a monthly benefit of $4,000 at age 60, which will pay them until death, perhaps 25 years, then someone has to come up with $1,200,000 in cash to make those payments. If the expectation is that the pension fund was supposed to accumulate that money during the working career of the employee, then during those 30 or so working years the pension fund should have been collecting $3,333 per month towards that end.
For the employee making $90,000 per year, the cost to the state, or employer, should have been $130,000 per year. The point here is that the retirement funds must be taken as taxes at some point. Someone must work to produce something that can then be taken from them as taxes in order to pay the subsidy to the worker who wishes to withdraw from the work force. This can be done during the tenure of the employee as an employee or it must be done later. There are few options.
The point in taking the money and actually placing it into a retirement fund is that retirement funds are real money that comes from work someone has done in order to later pay the retiree to do nothing. Let me reiterate: someone must work to make the payments so retirees can do nothing yet continue to consume. This work was either done by the worker during his career, or it is done by someone else, but someone has to work and transfer their earnings to the retiree. So if the state, as the employer, believes a worker is worth $130,000 per year when working and takes a set amount of that each year to fund a retirement fund and the current payroll, there is no problem. However, that has not happened, which is the reason for the concern about underfunded pensions.
Governments have paid the employee, but have not properly paid the retirement fund. They have avoided doing this because in order to do so they would have had to tax the general population at much higher rates than they did. As is typical of politicians in fiscal matters, they have postponed the reckoning into the vague future for someone else to deal with. Because of their irresponsible action there has not been enough work done by someone, taken in the form of taxes, to pay for the worker who wishes to withdraw from the workforce to live on. Thus there is not enough money to pay the obligation, hence the term unfunded liability.
This underfunding – more accurately, under-taxing and over-obligating – is true in many government retirement funds, and Social Security. Government pensions have played a ponzi scheme by putting the partial funding in stocks and bonds, expecting them to grow fast enough to offset the actual fiscal policy decisions, knowing full well future taxpayers are on the hook for their misleading decisions.
This results in avoiding full funding of pensions, and putting off into the future the actual tax requirements of the promises made in current budgets. As retirements don’t come due for years, those legislators who made those untenable financial decisions are often no longer in office. They will not be held responsible, and the credit for making funds fiscally sound will fall on those in the future. The future is here.
Promises were made which cannot be kept. This is true of all retirement plans, including Social Security. Either the taxpayers or the retiring worker or some combination of both will lose some of what was promised: the taxpayer through higher taxes, the withdrawn worker through lower than promised payments. While the difficulties caused by past actions require difficult decisions, so too do decisions going into the future. We must reexamine our policies and promises. They must be fiscally sound for the future, not just politically comfortable for today. It is a moral requirement most politicians are incapable of understanding because their focus is on reelection. That being said, the people must require it of their representatives: truth in pensions one might call it. It is a lofty expectation. It shouldn’t be.
And now, the future is here. Some governors and state legislatures have been bold enough to say STOP. Governor Christie in New Jersey and Governor Walker in Wisconsin are at the front. How their battles end portend the future for all of us.
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