Just about every state and local government is in a financial bind because they're spending more than they take in. Public sector pensions are a major factor here. They already represent a big part of spending and they're underfunded by somewhere between one and five trillion dollars.
As those shortfalls come due, either taxpayers are going to get screwed through higher taxes and reduced services, or public sector employees are going to take a hell of a haircut. Here are three reasons to reform public sector pensions now.
Unsustainable pension payouts played a large role in the municipal bankruptcies of Detroit and Vallejo, California. In the 250 largest cities in the country, pensions on average soak up 10% of budgets, a 30% increase over just the past five years. As retirees start outnumbering workers – and the NYPD already has more former cops drawing a pension than active ones walking a beat – the amount of money spent on pensions is only going to skyrocket.
Public employees typically get to retire earlier and they pay less into their retirements than their counterparts in the private sector. On top of that, many workers game the system through often legal tricks such as "spiking" which is the act of artificially boosting the salary level on which the retirement payments are calculated. For instance, by cashing in unused sick days and vacation, Phoenix, Arizona's former city manager was able to jack up his annual retirement pay by almost $90,000 to a whopping $234,536.
Most government pensions guarantee payouts based on unrealistic investment returns. California said the investments in its pensions would return 8% every year, while actual returns have been far lower.
The result is that California's pension fund is only 42% funded. Taxpayers ultimately pick up the difference. As more public sector workers retire, pensions are only going to become a bigger and bigger issue. It's time to reform public sector pensions by reigning in lavish promises, closing loopholes, and switching over to 401k style pension plans that most private sector workers have.
Produced by Todd Krainin. Narrated and written by Nick Gillespie. Camera by Meredith Bragg.
Runs about 2:42.
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