Government Spending

If You Think Your State is Broke Now, Just Wait Until The Public-Sector Pension Bomb Detonates!

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Unless you've been pulling a Rip Van Winkle for the past few years, you know that your state is more busted than Larry Craig in an airport toilet. The only possible exception is the state of Denial, and it closed its borders to new arrivals sometime in late 2008.

One of the main drivers of this sorry state of affairs is the massive disparity between public-sector and private-sector compensation, especially when it comes to benefits such as pensions. Various studies have found anywhere between a 70 percent and a 34 percent differential in total compensation, with public-sector employees getting not just more pay and benefits but near-absolute job security and early retirement. Consider California:

A bipartisan bill…passed virtually without debate unleashed the odious "3 percent at 50" retirement plan in 1999. Under this plan, at age 50 many categories of public employees are eligible for 3 percent of their final year's pay multiplied by the number of years they've worked. So if a police officer starts working at age 20, he can retire at 50 with 90 percent of his final salary until he dies, and then his spouse receives that money for the rest of her life. Even during the economic crisis, "3 percent at 50" and the forces behind it have only become more entrenched.

In the midst of California's 2008–09 fiscal meltdown, with the impact of deluxe public pensions making daily headlines, the city of Fullerton nevertheless sought to retroactively increase the defined-benefit retirement plan for its city employees by a jaw-dropping 25 percent. What's more, the Fullerton City Council negotiated the increase in closed session, outside public view.

More on that here.

Unfunded state pension liabilities run in the neighborhood of $1 trillion. To understand just how this sorry state of affairs came about, read this report from ALEC.

There is a solution to this mess, the same solution that has been adopted by the private sector over the past several decades: switching from defined-benefit retirement plans to 401(k)-style defined-contribution plans. In a state such as Ohio, which is facing a $8 billion budget deficit and where state and local employees earn about 34 percent more in total compensation than their private-sector counterparts, bringing public-sector compensation into line with the private sector would cut the state's deficit by about 28 percent.

The alternative? Well, there isn't really one, other than destroying your state's economy. The politics of cutting public compensation are never easy but they have also never been more critical.

Reason on pensions.

Video produced by Josh Swain.

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  1. No alternatives other than to bankrupt the state? The local school board is holding a meeting Monday nite to discuss this vis a vis the teachers’ pensions. Massive tax increases will be needed. Does anyone have any practical suggestions, that would be legal, for offering a solution?

    1. Well, they can cut down on capital improvements, ensuring local kids aren’t familiar with recent technology, or they can fire a bunch of administrators, or they can get rid of the athletic programs outside of state requirements. I’d go with firing administrators and eliminating athletic programs.

      1. They could stop buying new “teaching resources” based on the latest annual educational fad and instead reuse books that contain objective information and facts instead of progressivist propaganda.

    2. Tax teacher pensions? See, we can say we supported a tax increase and the teachers themselves vetoed it.

      1. sorry, just saw that “legal” stricture. but ya gotta think”out of the box” ya know…

      2. Is there a legal way to force public employees to increase contributions for their own pensions? I assume there are contracts that can be renegotiated. And if they want to go on strike, fire them and hire new people at lower wages.

        1. Where the hell have you been? One of the requirements is it has to be legal.

    3. Does anyone have any practical suggestions, that would be legal, for offering a solution?

      Short-term solution:

      Cut the budget to the bone so the savings can be used to fund the pensions. Fire administrators, fire existing teachers, cut non-core curriculum classes and activities.

      Of course, there is always the alternative of raising taxes, but one day people will figure out that raising taxes does not equal a solution for the problem of too much spending.

      Long-term solution:

      Break the teacher’s unions. Get rid of defined benefit plans and replace them with defined contribution plans. Of course, for vested pensions, this is expensive, but it will be cheaper in the long run.

    4. kill and eat the retiring teachers? just saying, ya know…

      1. Finally, someone with a practicle idea.

        1. …or at least a modest proposal.

    5. Congress writes labor and bankruptcy laws. Congress can change them.

    6. Has anyone asked Chad? He’s worked out Social Security for us, so pensions should be a walk in the park.

      1. Hehehehe… get rid of pensions and live off social security?

        1. That was my guess at Chad’s solution.

    7. I’d suggest firing enough teachers to allow the current revenue to cover the pensions. This means increasing the workload of the remaining teachers to a level commensurate with the total compensation (inflated pension included) they are receiving.

      This gives the teachers the option of working for what they make or renegotiating compensation to levels that reflect the work they do.

      1. Since when is it legal to just fire teachers?

        1. If teachers aren’t working under a contract it’s perfectly legal to just fire them I believe. I’m assuming this discussion came up because OP’s teacher contracts are up for renegotiation.

  2. you know that your state is more busted than Larry Craig in an airport toilet.

    This has to be the work of The Jacket.

  3. Bankruptcy is the only solution as burdening the private sector with more taxes will lead the economy to a quicker downward spiral. The state employees have to learn to suck it up as the private sector has for the past two years. To pay these pensions over the long term will keep the states in the red for decades. This is a criminal act against the citizens to suggest that we must lower our expectations and life styles to subsidize the high paying salaries, with low producing results of those that are paid to serve us.
    Suck it up Crybaby
    http://www.suckitupcrybaby.com

    1. Boy, who is the crybaby? The taxpayers elected representatives who then made contracts with these people. People should be held to their contractual obligations.

      Elect new people to make better contracts for you. The solution is simple.

      1. What a maroon. You just fell for a trolling-spam-bot. A trambot, if you will.

        1. Nothing wrong with being a spambot.

      2. Hey everyone, let’s explain to minge, again, that contracts that you don’t agree to, and must be pay for, that are enforced at the point of a gun are not the same as contracts entered into by voluntary non-coercive means by consenting adults.

        Jeez minge, I thought with your, supposed, intellectual pedigree that you could come up with a better justification than the 51% bullshit.

        Every intrusion into private life and every expansion of the public realm is consistently defended with democracy. As if some magical morally justifying forcefield turns on when 50.1% of the population agrees to something.

      3. I agree, these representatives should be held to the contracts they made with the unions, even if it means taking everything they own and selling their families into slavery.

        1. They shouldn’t have a contract in the first place.

      4. This boils down to: “Democrats, elected with union money, have bankrupted governments by paying unions too much in salaries and pensions. That’s democracy.”

  4. Public employees are forgetting the Parasite’s Prime Directive: Don’t kill the host.

    1. So basically a pilot fish is smarter than the average public employee.

      1. The quote, “None of us is as stupid as all of us” comes to mind.

      2. by a long way…

  5. These ridiculous pensions need to go, but 401k-type plans are not really a solution, either, with the degree to which the markets are gamed by government-favored trading companies, hedge-funds, and insider trading.

    1. 401k type plans dont have to invest in the market. Can buy bonds or CDs. Well, IRA type plans can. I guess some 401ks may have a money market option.

      1. Some (many?) 401k plans have brokerage windows that allow you to invest in anything the participating brokerage offers. The cost is usually something like $50 a year.

        1. That’s what I do – “self-direct”. After some flopping around reallocating, I’m beating the market by a hair, though I’m still down for the year.

          1. disclaimer: cop with a good contract

            i started buying a gold fund in 1998 as part of my investing, so i have totally beaten the market, but i digress.

            let’s remember that there is no 20 yr period in history where simple dollar cost averaging hasn’t yielded a positive return (in a broad basket of stocks)…

    2. The solution is not having your employer be responsible for planning your retirement.

  6. Oh boy, that is certainly not going to be good now is it?

    Lou
    http://www.anon-tools.au.tc

  7. You can’t take away my Golden Ticket.

    1. Watch me.

  8. So if he retires at 65 he gets 135% of his final salary?

  9. Can you say “credit risk?”

    I didn’t think so.

  10. The challenge of the first poster was “Does anyone have any practical suggestions, that would be legal, for offering a solution?” No one has posted anything that meets all three….a solution, practical and legal!

  11. well im just gana say that the destruction of that dyer was awsome…

  12. I’d go with firing administrators and eliminating athletic programs.

  13. Stupid me. I worked for a private sector company and after 24 years I only get about 1/3 my final year’s salary and there is no COLA and if I die before my spouse, she loses the pension after 10 years of us pulling on it.

  14. Your website is so much nice i would like to see all the posts but i have dont enough time to do it. Over all i loved your all the articles

  15. good i agree with your point

  16. Wow I am surprised, I thought if anywhere I would find a discussion about individual State’s CAFR.
    If you think your state is broke then get back on the crack pipe – they ain’t & most every major city & capital with the exception of Philly is swimming in an excess surplus & cash.
    Philly is just paying off bonds now instead of paying them over the 20 years like they are stated.
    Please go to CAFRMAN.com and educate you will be surprised

    1. Meant to state that I thought I would see a discussion about the CAFR on Reason

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