State and Local Governments as Pension Plan

Increasing state and local governments are transmogrifying into public employee pension plans with the power to levy taxes to the detriment of all of their other functions. At Democracy Richard Vague proposes some solutions:

  1. Let the Feds pick up the tab.
  2. Lower funding requirements.

The first sounds to me like a license to steal and the second sounds like denial.

I haven’t studied the spending of every state but I am pretty familiar with Illinois’s. Here are my counter-proposals. No solution to Illinois’s particular problems in this area can be understood except in the understanding of the reality that between 1995 and 2010 Illinois froze the contributions to public employee pension plans while increasing public employee wages sharply. And many public employees in Illinois don’t contribute at all to their retirements. Their jurisdictions pick up both the government’s and the employee’s share of pension contributions and they’re exempt from paying FICA.

  1. The state’s constitution must be amended to allow the state to deal with the situation.
  2. All public employees should immediately be transferred to a defined contribution plan. #1 is necessary for #2 to happen.
  3. Double-dipping should be banned.
  4. An absolute cap should be established for Illinois public pensions. Here there are some retired public employees collecting more than $1 million per year in pensions.
  5. Public employees unions should be banned from engaging in political activity. This is an obviously corrupt practice.

Even those draconian measures won’t be enough to save Illinois. The state can’t even muster the political courage to enact regular budgets let alone deal with the massive pension overhang. It can increase tax rates but it can’t force people to stay.

9 comments… add one
  • Gustopher

    Regarding number 5 — why is that a more corrupt practice than corporations engaging in political activity?

    Unions, public sector or not, do not have the same seat at the table that corporate lobbyists have.

    I’m not saying that “both sides do it, so it’s fine”, I’m saying “corporations do it more, and defanging unions alone is going to have terrible consequences.”

  • Gustopher

    The pension problem is just a preview of the retirement crisis that Americans are facing — 401ks have generally been a failure, and no one has saved enough for retirement (well, basically no one). Social Security hasn’t kept up with real inflation rates, and was never meant to provide a full retirement anyway.

    When the baby boomers retire, I don’t know if we will be content to let our elderly live in poverty, or force them to leave their homes to find cheaper places to live. Or how those cheaper communities will deal with the influx of a large number of old people, who need higher services, and pay relatively little in taxes.

    And with people free to move from state to state, that seems like a problem that will either be addressed at a federal level, or which will trigger a race to the bottom to send the burdensome old people somewhere else.

  • why is that a more corrupt practice than corporations engaging in political activity?

    Because it allows politicians to recycle public money into campaign workers, contributions, and votes in a way that corporate contributions do not.

    I’m saying “corporations do it more, and defanging unions alone is going to have terrible consequences.”

    That is just wrong on the facts. Go look at the top political contributors. Public employee unions dominate the top of the list. At the federal level most public money is spent in four ways: Social Security, Medicare, interest on the debt, and defense. I’d cut defense spending, too, but I also want to reduce our military commitments. The porkbarrel spending you’re thinking of is largely a thing of the past.

    That having been said I’d prohibit corporate contributions, too, but I’m a stifler of free speech.

  • When the baby boomers retire, I don’t know if we will be content to let our elderly live in poverty, or force them to leave their homes to find cheaper places to live. Or how those cheaper communities will deal with the influx of a large number of old people, who need higher services, and pay relatively little in taxes.

    I was just having this conversation with a friend this morning. As I see it the problem with Social Security is that, due to changes in our economy and society, changes with which I have disagreed for decades, not enough income is subject to the tax to maintain it as was envisioned.

    My first choice in mending it would be to abandon the fund accounting we’ve been doing for the last 70 years, eliminate FICA, and pay SSRI out of the general fund. My second choice would be to raise FICA max to whatever level would subject 99% of income to the tax, index it, and adjust the upper levels of SSRI earnings downwards as we have been for decades.

    The path we’ve been on—raising FICA and extending the Social Security retirement age—is incompatible with the realities of American life.

  • Gustopher

    Because it allows politicians to recycle public money into campaign workers, contributions, and votes in a way that corporate contributions do not.

    That’s worker money, not public money. Once money leaves the employers pocket, the employer has no say in where it goes.

    Public sector unions have also, like the rest of the unions, been getting the crap kicked out of them, so the cycle isn’t working as you think it is.

    And, I would put lobbying dollars, third-and party PAC donations with the political contributions to candidates before looking at how much each is spending, to get a whole picture.

  • Gustopher

    I think we are basically on the same page on social security, give or take (I think we will probably need some federal tax redistribution, otherwise Small Cactus, AZ will have problems when lots of NY retirees move there, have minimal taxable income, and just suck up what services there are)

    Underfunding pensions, social security and individual retirement funds are all part of the same picture though — a society that is living beyond its means at every level. And we just cut taxes on the wealthy and corporations. Woo.

  • Public sector unions have also, like the rest of the unions, been getting the crap kicked out of them

    In Chicago the teachers went out on strike a couple of years back and received a 16% raise over three years in a period when inflation was under 2% per annum. This is on top of a median wage of $80,000 for a nine month job with bachelors in Ed. only, no need to pay Social Security, the ability to retire on three-quarters of your ending salary, full health care, and practically no possibility of being terminated for any reason. Chicago police officers and firefighters have median salaries around $100,000 and full benefits.

    If this is “getting the crap kicked out of them”, I’ll have some.

  • Andy

    Gustopher,

    There are pretty fundamental differences between public and private employee unions:

    – Public employee unions play a significant role in selecting their future bosses, a benefit private unions don’t have.
    – Public employee unions both lobby and “negotiate” with their employers, private unions can’t.
    – The purported purpose of the private employee union is to protect members from the supposed predatory practices of a profit-driven corporation that will exploit individual workers in pursuit of profit – hence the need for collective bargaining. The purpose of a public employee union is to protect it’s members from…what exactly?

    The incestuous nature of public employee unions and, particularly, local government is pretty obvious.

  • Guarneri

    “The pension problem is just a preview of the retirement crisis that Americans are facing — 401ks have generally been a failure, and no one has saved enough for retirement.”

    In addition to all the points made by Dave, since when is it my duty to save for your retirement?

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