Rumors of War Between Private and Public Sectors
Funding of public pensions has been woefully short of what's needed to make good on those promises. The shortfalls are "off balance sheet" liabilities that run into the trillions of dollars.
Here's the bad news as reported by Professors Robert Novy-Marx (University of Rochester) and Joshua Rauh (Northwestern's Kellogg School of Management):
* Unfunded liabilities for public pensions run by the 50 states total $3.23 trillion—$21,500 per household.
* Underfunded pensions for municipal and local government employees add another $574 billion of hidden debt—$14,000 per household.
The data from federal sources is also grim:
* Unfunded US military-retirement obligations now amount to $30,000 per household.
* Unfunded federal civilian-employee pension obligations represent another $16,000 per household.
That's a lot of dough and, as Meister points out, the defined-benefit plans often taken for granted have become virtually unheard-of in the private sector. He also notes,
Many current public workers have vested legal rights to their fixed pensions—but the feds can and should tie any bailouts of state and local governments to the public unions agreeing to reduced benefits and conversion to defined-contribution plans for younger and new workers.
Regardless of federal actions, this is in fact happening in various places where new workers are either given the option of switching into defined-contribution plans or made to. Such a shift not only will save taxpayers money but will allow states and municipalities to budget more squarely. Part of the reason for the chronic underfunding of public pensions comes from the fact that folks in charge always vote for lavish benefit increases whenever they can get away with it and part comes from the ability to invest pension funds in the stock market (meaning that in boom times, public entities seemingly only pay pennies on the dollar for future benefits). A turn to 403(b) pensions (the nonprofit sector's equivalent of 401[k]s) would alleviate that issue. The government would have to kick in its share every pay period, just like regular employers do.
Matt Mayer of Ohio's Buckeye Institute did a study suggesting that bringing public-sector compensation in line with private-sector compensation (a figure that includes pay, health benefits, and retirement) would trim Ohio's estimated $8 billion deficit by over $2 billion. I'm sure similar savings would accrue to any state that did so.
Past discussions about private-sector and public-sector compensation issues.