A lot of city and state governments have a pension problem. Before we come to the conclusion that pensions simply aren't viable, James Surowiecki wants us to look more closely at the decisions politicians made--and the payments they did not make--that got them, or their hometowns, into this predicament. From the New Yorker's Financial Page : How did states and cities get into this jam? By following Mark Twain’s famous dictum: Never put off till tomorrow what you can do the day after tomorrow. In principle, providing for pensions isn’t difficult: governments set aside money every year to fund them, just as workers contribute a percentage of their salary every year. But that means raising taxes or spending less on things that voters like, so politicians often just let pension contributions slide, passing the bill on to future taxpayers. Politicians are adept at rationalizing such irresponsible behavior. When markets are up and pension funds are flush, they say that there’s no need to add money. When times are bad and tax revenue drops, they say that they can’t afford contributions. Illinois, for instance, has been shortchanging its pension fund forever. “The politicians in Illinois are deadbeats,” Alicia Munnell, the director of the Center for Retirement Research, at Boston College, told me. “They just did not pay their bills, and, lo and behold, they’re finding that they can’t make up for all those years of not doing what they were supposed to do.” Governments also got in the habit of promising workers higher pensions in the future so that they would accept lower wages in the present. To make matters worse, whenever pension funds looked especially robust public employees lobbied for higher pensions, and politicians were all too willing to grant them. In 1999, at the height of the tech bubble, California retroactively increased benefits for every government employee by twenty-five to fifty per cent. This was terrible policy. As Munnell says, “You have to put aside the excess return you earn in good times to cover your costs when the bad times hit.” But lots of states did similar things. Even more egregious, Detroit’s pension fund routinely sent bonus payments to retirees whenever it had a good year. This weakened the fund and increased the burden on taxpayers, but, since pension accounting is eye-glazingly dull, few complained.; Everyone pushed off the day of reckoning, with no real thought for the taxpayers who would eventually have to foot the bill. Now that that day has arrived, you can see why governments want to claw back some of the benefits that were handed out. But this would be unjust: state and city employees worked for those benefits—teaching kids, policing the streets, and so on—and they often did so for lower wages than they would have accepted with no promise of a pension. Governments should live up to their obligations, but we can’t let them make irresponsible promises again. The temptation to defer expenditure is intrinsically hard for politicians to resist. We need reforms to control costs and to insure that governments actually pay their bills. Read the full article here .
Filed under: cities, wages, James Surowiecki, The New Yorker, deficits, pensions, pension funds, Financial Page, city and state government, deadbeat governments, budgets