For real pension reform, inequality must be stressed

Sun Sentinel (Ft. Lauderdale, Fl.)
By Rich Danker
May 14, 2013

Just a few years ago, pension reform appeared inevitable. The drop in asset prices during the financial crisis had left public pension funds trillions of dollars behind on meeting future obligations. The defined benefit model was under fire as unduly expensive.

Utah in early 2010 passed a law to put new workers into 401(k)-style accounts. Later that year the American Legislative Exchange Council adopted model legislation (which I coauthored) that did the same thing. We thought this would take off around the country and save state and local governments from accumulating more pension debt.

Instead, three years later, there hasn’t been much progress. Except for Rhode Island, which in 2011 downsized benefits for both current and new employees, there have not been any breakthroughs. [EXPAND Read more]

Most of the pension “reforms” – Pew Center on the States counted 43 of them from 2009-2011 – were just tweaks to the status quo. For instance, New Jersey increased the retirement age, bumped up contributions, and suspended cost of living allowances. But it kept its defined benefit system intact. Three years later the state is facing another pension crisis.

Where did the effort fail? Simply put, the austerity argument for pension reform is not politically effective. Even though benefits threaten higher taxes and public service cuts in the future, voters have a hard time seeing a reason for reform now if the gains are not apparent. Opposing irresponsible government spending is the politically correct position to take, but voters don’t always apply it to their choice of candidate or issue position.

What’s a better way to promote pension reform? The principle of fairness: Why shouldn’t government workers get the same type of pension as everybody else? Most companies that offer pension plans switched from the defined benefit to defined contribution model decades ago. Therefore just about everyone in state and local government has access to a nicer pension than their peers in the private sector.

This pension disparity between classes of workers is sometimes defended by legislators as necessary to compensate for lower wages in government. During a recent floor debate when pension overhaul was voted down by the Florida Senate, Republican Jack Latvala, R-St.Petersburg, said that some workers – such as two young men who died fighting a fire – make as little as $26,000 per year. “They worked for their pension,” he said.

But in that case government agencies need to raise salaries, not boost pension benefits, to provide their employees proper compensation. Shifting it into retirement deprives the worker of earnings and enables the state or city to turn hide their labor costs as debt.

Moral arguments about economic issues can deliver breakthroughs when budget arguments fail. For instance, linking government assistance to a work requirement was the overriding theme of the hard-won welfare reform law of the mid-1990s.

Emphasizing moral themes rather than numbers also helps pension reformers avoid a negotiation setup that produces unsatisfactory compromise. Public employee unions will offer to accept modest cuts to preserve the defined benefit model – then apply pressure to the other side to agree or appear unreasonable.

Congress dramatically downsized the civil service pension system in 1986 after a commission discovered the benefits were approximately three times as large as what top private plans offered. The fact that the federal government couldn’t afford them was sort of beside the point: the federal government can’t afford a lot of things yet Congress approves them anyway. Likewise, many states have no credible plan to fund their retirement liabilities yet they keep their pension systems open.

In the same vein, voters typically respond to fiscal challenges when they see money or public services slip from their grip. It’s difficult for a citizen to deduce how a problem involving billions of dollars affects them. But matters of basic principle such as fairness can’t help but prompt a visceral reaction. That’s why the lesson of recent experience for pension reform is that it is better to propose to solve a problem of inequality rather than one of math – that kind is harder to ignore.  [/EXPAND]