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Townhall...
How Public Employees
and Taxpayers Got Scammed
By Steve Chapman
Public employees have been cramming the Wisconsin state Capitol to
protest the governor’s plan to cut their take-home pay and gut their
collective bargaining rights. You can’t blame them for objecting when
the state reneges on a deal. But they should have been protesting years
ago, when politicians and union leaders struck a bargain that was too
good to be true.
Government workers have long accepted a tradeoff. They get lower pay
than they might get in the private sector, but better retirement
benefits. They give up some current luxuries for more security later
on. The great majority of them have pension plans with guaranteed
payouts -- an option that has largely disappeared from the private
sector.
Most businesses long ago abandoned defined-benefit plans because they
were unaffordable. The public sector has stayed with them, though --
apparently to prove those private companies right. State and local
governments, according to pension expert Joshua Rauh of Northwestern
University, have promised $3 trillion more in benefits than they have
set aside to pay for them.
Why? Because there are powerful incentives for both legislators and
union leaders to do that. Politicians (particularly, though not
exclusively, Democratic ones) want to ingratiate themselves with
unions, whose members can be a huge help on Election Day. Union leaders
want to keep their members happy and return their favored elected
officials to office.
The problem, of course, is that such generosity costs a lot of money,
which taxpayers may resist paying. That’s where the back-loading of
compensation comes in.
Promising government workers excellent retirement plans, off in the
future, gratifies union members without outraging the taxpayers. The
burden is postponed until some future date, which makes the process
painless -- until the future arrives.
Wisconsin is a typical state, with more than $45 billion in unfunded
obligations by Rauh’s calculation. Taken as a percentage of gross state
product and state revenue, he informed me, that makes it about average
or “maybe slightly worse.”
But the phenomenon is a national one. Though Republican Gov. Scott
Walker has targeted union negotiations, the same problem exists in
states where public employees lack the collective bargaining rights at
issue in Madison. South Carolina, Alabama and Mississippi are among
those, and their unfunded obligations loom even larger than Wisconsin’s.
If collective bargaining gave too much power to public employee unions,
you might expect states that mandate collective bargaining to have (SET
ITAL) lower (END ITAL) unfunded obligations -- because the unions would
be able to demand full funding. But that’s not the case.
Union-friendly Illinois is one of the worst states in the country in
shortchanging the public employee pension system. Over the years,
elected officials have cut the state’s contributions, diverted funds to
pay other expenses and borrowed money to cover current pension
obligations. But no mobs of teachers and police officers descended on
the state Capitol to protest, because they didn’t grasp the
implications.
Now we can all see the damage done. Though public employees have paid
their share, the state has failed to keep up its end of the bargain. So
in Illinois, as in Wisconsin and many other places, there is a conflict
between what they were promised and what the citizenry is prepared to
pay.
Government workers and taxpayers are both victims of this scam, which
allowed extravagant pledges that don’t have to be redeemed until later
-- by which time the governors and union officials who devised them are
gone, leaving someone else to cash the check.
In the private sector, these shenanigans would never be tolerated.
Public pension systems get to assume implausibly high returns on their
investments, which gives the impression they can meet their future
needs.
The looser rules “allow governments to base their budgets on economic
fictions,” writes Orin Kramer, who oversees investments for the New
Jersey system, in The New York Times. You could even call it fraud.
Republicans in Congress are trying to prevent deception by requiring
public pension systems to follow the same basic rules as corporations.
Politicians hate the idea for the same reason the rest of us --
government workers included -- should welcome it. As Moody’s Investors
Service said in endorsing the plan, it would “provide new incentives to
state and local governments to take action to ensure public-employee
pension plans’ long-term viability.”
Creating incentives for governments to behave honestly and responsibly?
It’s a new concept, but it might be worth a try.
Read it at Townhall
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