Government Pensions: The Next Major Financial Crisis
Picture this: You're driving across the Mojave Desert and your car breaks down. You left your phone at the hotel, so you can't call for help. You have a bottle of water, and you think you're nearing the end of the desert, so you get out of the car and start walking. After a few miles you're exhausted, sunburnt, and sick. Just then a car pulls up, and big man gets out and says, "Hi, I'm from the government, and I'm here to help."
You're overjoyed. At this point, the behemoth government worker climbs onto your back and demands that you keep walking. There's not much you can do, since he's from the government and you're not. So you walk, or rather stagger, onward. After a while, he says, "I'm thirsty." You hand him your water bottle. He drinks from it, then keeps it. Finally, you muster the courage to ask, "Why am I carrying you and giving you my water when you had a car?" The government worker says, "I ran out of gas. Lucky for you it happened just when I found you. Keep walking."
I spin this little yarn to illustrate a real-life story to which folks are just beginning to awaken. Most government workers in your state, county, and local municipality participate in a "defined benefit" pension plan. That means that your tax dollars get used to make sure that, whatever happens in the stock market, the government employee gets a guaranteed payout at retirement.
Here's a practical example from Lehigh County, Pennsylvania, where I'm running for county executive. Because the markets started to tank in 2008, Lehigh County taxpayers involuntarily kicked in an extra $4 million in 2009 to make sure that government retirees get their guaranteed outcome. The market got worse, so next year, taxpayers will contribute an additional $12 million to cover stock market losses in the pension fund. That amount equals more than 11 percent of the locally raised portion of the county budget. There's no telling how much more the fund will need in 2011, and the reserves which the county executive used to cover the losses this year will be drained dry in 2010.
Now, unless you work for the government, you probably have your retirement money in something like a 401(k) or IRA which has no such guaranteed result. You may have a "defined contribution" plan, meaning your employer has agreed to set aside part of your compensation for retirement, shielding you from current income taxes. No one knows how much of a payout you'll get in your sunset years.
So, when the markets are down, your retirement account gets hammered. But the government worker, who rides on your back through this financial desert, has no worries. He'll still get what was promised him at retirement.
You might wonder who struck this deal on your behalf, since it's destined to increase your liabilities at a time when you can least afford it.
Well, say thank you to the state and local career politicians, many of whom were elected with support of labor unions. Once in office, they go through the motions of negotiating with these same bargaining units on your behalf. But which side of the table are they really on? Do you think, for example, that the county executive in Lehigh County, who has received some $75,700 in campaign contributions from union political action committees, is the best agent to drive a hard bargain with union bosses who are essentially part of his reelection campaign?
Go to your county budget hearings and listen to the outcry from government employees and union bosses if your elected officials even try to reduce the rate of increase in their pay ... and this at a time when many local companies are doing layoffs, pay cuts, and other sorts of downsizing efforts in order to weather the economic storm.
Last week, I listened in shock as a union boss stood up in a public meeting and threatened the Lehigh County commissioners with more grievance filings (an expensive process) if they did anything to jeopardize the harmonious relationship the union has with the county executive whom they helped to elect. In brief, he was saying, "Increase our pay, or we'll make trouble every day."
I almost laughed out loud when several government workers suggested that the county would "lose good people to the private sector" if the proposed pay hike didn't remain part of the 2010 budget.
Imagine if a county commissioner had mustered the nerve to say: "If any government employee can do better in the private sector, let her go. After all, we need smart, hardworking folks in local companies, since the private sector is the only source of prosperity for our local economy."