What's that old saying? "Things that can't go on forever won't."
Politico reports "Public employee unions under fire again: And not just from Republicans." It turns out that higher-than-market compensation packages for state and local workers are putting the Cobra Clutch on budgets like Sgt. Slaughter used to put on wrestlers in the WWF.
Democratic politicians have sometimes clashed with public-employee unions over pensions that are squeezing state budgets. Here, too, Illinois features prominently, because nowhere does the state pension problem weigh more heavily. The state's Democratic attorney general, Lisa Madigan, is arguing in court for emergency powers to trim state pension benefits.
"As expenditures on benefits increase," writes Daniel DiSalvo, senior fellow at the Manhattan Institute, a conservative nonprofit, in his 2015 book "Public Union Power and Its Consequences," these expenditures "'crowd out' government spending on parks, education, public safety and other services on which the poor and middle class rely. In short, government costs more but does less." Such pressures are felt by Republicans and Democrats alike — indeed, so much so that some Democrats now openly pronounce themselves anti-union. In his book, DiSalvo quotes San Jose Mayor Chuck Reed, a Democrat who's clashed with public-employee unions, saying, "There's a difference between being liberal and progressive and being a union Democrat."
This is simply the endgame of a process that swung into high gear a result of the financial crisis. The simple but rarely acknowledged fact is that public-sector workers make a lot more money and take home a lot more in benefits than do their professional counterparts in the private sector (and note, we're talking apples to apples here, such as public-school versus private-school teachers).
For instance, back in 2010, I reported on a study that found Ohio state workers made 34 percent more than their analogues in the private sector; in Michigan the differential was 47 percent. USA Today looked at federal employees and found that they took home about 45 percent more than people doing the same jobs in the private sector. That old argument about public-sectors workers gaining job security and decent benefits in exchange for less compensation hasn't been true for a very long time.
Much of the pay gap comes in the form of retirement benefits for pensions. Politicians can be extremely generous to current workers by promising them spectacular and guaranteed payouts that will be covered by future taxpayers. But those days are ending. Again and again—and certainly in states such as Illinois and cities such as Detroit—those promissory notes are coming due and there's just no way they can be cashed. The defined-benefit model, in which workers are guaranteed higher-than-market returns, early retirement ages, and in some cases higher annual pay than what they earned on the job, are over.
It comes down to a simple question in which there is no easy answer: Who exactly is going to take the haircut? Will it be the taxpayers, who are stuck with ridiculous promises made by yesteryear's politicians (who were often in the pocket of public-sector unions)? Will it be public-sector pensioners, who are understandably enraged at cuts to their retirement payouts? Certainly, it will be new public-sector workers, who will not get much lower pay and benefits than folks hired 10 and 20 years ago. The worst possible outcome is the sort that played out in places such as Vallejo, California a few years back. The city was going bust in large measure due to ridiculous public-sector compensation levels. A slate of candidates ran for city council on a reform platform in which they promised to take the city into bankruptcy and rewrite labor contracts if the courts allowed it. That all happened and then…the new councilmembers blinked and did nothing.
The situation is dire but not (yet) hopeless. Cities, counties, and states that take the issue seriously and address existing and future funding gaps and switch to defined-contribution plans can actually create a situation that makes future economic growth more likely. For in-depth policy work on pension reform, check out Reason Foundation's studies and articles on the topic.
Watch "3 Reason to Fix Public-Sector Pensions NOW"