The Pension Tide Begins to Turn

JUNE 19, 2012

For anyone who has been following the pension issue that is affecting nearly every county in every state in this nation, the news from earlier this month is encouraging. The Wisconsin governor survived a recall vote brought against him because of his pension reforms. Governor O’Malley made similar changes to our system (and suffered through no such recall vote). And two cities in California – a state even more strapped for cash than ours – passed voter initiatives that drastically change public pensions to be more affordable.

I’ve written many times before about how unsustainable defined-benefit systems are. They are all-but-extinct in the private sector for precisely this reason. Yet they persist in the public sector for two reasons: 1) exceedingly powerful public unions and 2) state and local governments that simply raise taxes when expenses for employee pensions and benefits increase.

That system has worked for some time, but the piper always has to be paid eventually. The next few years is that “eventually” for most counties; some (like San Jose and San Diego) are already there. The ever-increasing expenses from their pension system were so great that they found it impossible to fund other important government services, like firehouses, police stations, and libraries.

Voters were getting tired of going without so that public employees – who generally already enjoy more job security and higher salaries than their counter-parts in the private sector – could keep a pension system that was far more generous than anything you would find in “the real world.” And so they did what a few Marylanders are already doing with issues like same sex marriage and the Dream Act: they called a vote.

The results were overwhelming. In both counties, more than two-thirds voted to reduce benefits not only for future recipients but also for current workers. In essence, they voted to switch from a defined-benefit system to a defined-contribution system – and to increase the amounts that public employees must contribute here and now. These are changes so sweeping that they are already being met with lawsuits from employee unions.

Trouble is: these reforms are as necessary as they are sweeping. In fact, they may not be even be enough. When I was doing the research for our Pension Map (which breaks pension debt in Maryland up by county), I found that it was actually the health benefits that weighed most heavily on MD taxpayers. True, the pensions were underfunded. But a few good years for investments and a slightly higher contribution rate could fix that.

Healthcare, on the other hand, is only getting more expensive each year. Right now, most public employees have very generous health plans that will soon be worth more than their pensions. If we don’t start focusing on these benefits soon, we’ll be facing an even more unsustainable situation.

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