How can politicians reform public pensions if they don’t have the public trust? Published by Jane the Actuary View all posts by Jane the Actuary
2 thoughts on “Forbes post, “Public Pensions And Social Trust””
Most people and many Illinois legislators do not care whether teachers and other public employees have “contributed responsibly to their pension funds” or that teachers will receive [little to] no Social Security when they retire. It is troublesome that most people and many legislators do not care whether retired teachers’ and other public employees’ defined-benefit pension plans are a fundamental source of economic stimulus to communities in Illinois and the only retirement income for hundreds of thousands of people.
Most people and many legislators do not care that the State of Illinois has not consistently paid its full constitutional and obligatory contributions to the public pension systems throughout the decades, that this money was diverted to other operating expenses and special interests’ groups, that the State of Illinois saved billions of dollars by not paying what actuaries have calculated the Teachers’ Retirement System should have received throughout the years, that this theft also enabled the State of Illinois to provide services for its citizenry without raising taxes during that time, and that this money was deferred-earned income for teachers in Illinois.
It is obvious Illinois legislators do not possess the resolve to take on an inadequate fiscal system that fails to generate enough revenue growth to properly maintain state services and pay state expenditures for health and social services, education, government, transportation, capital outlays, public protection and justice.
Be that as it may, Illinois legislators should transform the state’s failing revenue system and unfunded pension liability. They should find ways to generate more revenue instead of perpetually attacking public employees’ and retirees’ pensions. They should restructure the unfunded pension liability. The so-called Pension Ramp is flawed! Most importantly, they should defend the Illinois Constitution above all else.
Too few people realize the size of the public pension crisis that has been building as politicians and union leaders have repeatedly kicked that can down the road for the past 30+ years. But as Herbert Stein famously observed, “if something cannot go on forever, it will stop.” That this will be the case with public pensions isn’t in question. What remains to be seen is how the accompanying painful costs when we reach that point will be distributed. Suffice to say, those consequences will be more severe than most people currently appreciate.
I have, for better or worse, seen my fair share of pension crises, with a range of outcomes, both good and bad. Let me cite two. In Rhode Island, almost 20 years ago, I argued for using the proceeds from the tobacco settlement to shore up public pension funding. On the other side of this argument was the progressive wing of the Democratic Party, which argued that those funds should be used to increase already generous (and ongoing) social safety net benefits. I have never forgotten that public sector union leaders went along with them. Government performance didn’t improve, public frustration grew, and eventually everybody lost.
I later moved to Calgary, where the public pension problem was solved. How? Premier Ralph Klein told the unions and school boards he would cut pension benefits (easer to do in a parliamentary system than here in the US) if lots of parties didn’t come together to improve government performance, and especially school performance. The business community supported him, and he passed a bill that shifted a lot of power from local school boards to the provincial ministry of education. And when school performance dramatically improved, the business community and a majority of voters approved — more than once — tax increases to fund higher teacher salaries, higher pension fund contributions, and more investment in the K12 system to accelerate performance improvement. In this case, everybody won.
For me, these experiences illustrate a critical point: Simply wishing for greater social trust as a precondition for solving the public pension crisis won’t work, because that trust must be earned. And it can only be earned through substantial public sector performance improvement. But that is unlikely to happen given the constraints that prevent it — e.g., prohibitions on firing poorly performing or chronically absent employees, the power of local school boards, etc.
That leaves us to argue over how the painful consequences of what seems to be an inevitable series of public pension crises will be split between (a) sharp cuts in public budgets if employer contributions dramatically increase; (b) sharp reductions in public employee take-home pay if their pension contributions sharply increase; (c) cuts in retiree benefits; (d) sharp increases in state and local taxes (ultimately property taxes, as the sales and income tax bases are mobile); and/or (e) a sharp increase in federal debt (and likely taxes) if state and local pension plans are bailed out by the national government.
Of course, you could say that these will all be avoided by a sharp increase in economic growth. But given demographic trends, that can only happen if productivity sharply increases. And that’s unlikely as long as US K12 education results stagnate at their currently poor levels, which the capabilities of labor substituting technologies keep exponentially improving.
A bleak forecast, to be sure. But judging from the number of Illinois license plates you see these days in Colorado, and the number of their owners who report they’re selling their Chicago area homes and moving permanently to their condos in Breckenridge and elsewhere, it seems to be a forecast that is increasingly shared. And at some point, more residents of many other states (including, ironically, Colorado) will realize they’re also in the same boat (as Bob Arnott has already presciently forecast in his WSJ column).