Actuaries estimate public sector pension plans could be underfunded up to $4 trillion dollars. This means that many state and local governments may not have enough money to fund government employees’ pension benefits. This could also mean that governments raise taxes or cut services to pay promised pension benefits—thereby holding the taxpayer responsible, or cut pension benefits—holding government workers responsible.
In short: pension reform requires trade-offs—tough trade offs. Governments have largely promised government workers defined-benefit pension plans, which guarantee a regular pension payment for the rest of government retirees’ lives. Because they are guaranteed, taxpayers are on the hook regardless of how well government and the employees contribute or how well the market performs. In contrast, private sector workers generally save for retirement with 401-k style retirement accounts based on what they and their employer contribute and market returns. In other words, private sector employees are responsible for their own retirement savings.
The latest Reason-Rupe poll took these difficult questions to the American people to ask how they would make trade-offs between promises made to government workers and taxpayer bailouts of the pension programs. As one might expect, significant differences emerge between public sector workers and private sector workers.
Part of the issue is that private sectors workers think government employees’ benefits are better than those with similar jobs in the private sector by a margin of 60 to 36 percent. Moreover, private sector workers tend to hold both government officials and public employees responsible for the underfunded pension problem, while government workers primarily blame government officials. Consequently, private sector workers approve of a number of proposed reforms to control public employee pension costs that public employees predictably oppose.
Calculating Defined Benefit Contributions
For instance, 62 percent of private sector employees favor setting a cap on the dollar amount of annual pension payments government workers are allowed to receive and 33 percent oppose. In contrast, 53 percent of government workers oppose such a salary cap, while 38 percent favor.
Similarly, 58 percent of private sector workers say government worker pensions should be based on salary alone, but government workers think (55%) employees should be allowed to increase their pensions by also counting unused sick time, vacation time, and specialty pay.
Shifting Government Workers to 401k Style Accounts
Many reformers believe that shifting public employees from defined benefit pensions that keep taxpayers on the hook to 401k-style accounts like those in the private sector will be more sustainable in the future and less costly to taxpayers. However, government workers oppose such a transition, and understandably so. Shifting to 401k-style accounts would essentially break a promise (and a contract) made to government workers when they took their jobs and hold them more responsible for saving for their own retirements like private sector workers.
Not surprisingly private sector workers—who largely fund government workers’ defined benefit pensions—strongly favor shifting current employees to 401k style accounts by a margin of 65 to 31 percent. However, public employees oppose 52 to 46 percent. Nevertheless, a slim majority of government workers would favor such a reform if it only applied to future government workers, and not themselves (54 percent favor to 43 percent oppose).
When survey respondents were asked if they would favor 401k-style accounts for government workers if it meant “benefits were not guaranteed and would depend on how well the employees and government save and invest,” 57 percent of private sector workers continue to favor such a transition, only an 8 point decrease. Public employees would continue to oppose 61 to 37 percent.
The one message tested that persuaded private sector employees to oppose a shift was if “this meant breaking a contract made with public employees when they first accepted their jobs.” Fifty-two percent would oppose such a shift and 43 percent would continue to favor. Public employees continued to oppose 73 to 25 percent.
Interestingly, government workers remain opposed to 401k-style accounts even if that means taxes would have to be raised on everyone else or government would have to cut services. Indeed, 56 percent would still oppose a shift if otherwise taxes would need to be raised and 54 would oppose if otherwise government would need to reduce services. Private sector workers were much opposed to both these alternatives, particularly tax hikes. Fully 73 percent would favor shifting government workers to 401k-style accounts if otherwise taxes would be raised and 64 percent would favor a shift if otherwise government services would be cut.
Funding Current Pensions
While shifting government workers into 401k-style accounts may ease the future burden on taxpayers, this does not sufficiently address the current problem of promised, underfunded benefits. Once again, the primary proposed reforms include tax hikes, service cuts, or reforming public employee pensions.
In the absence of concrete trade-offs, both government workers and private sector employees oppose raising taxes or cutting government services to fund pension benefits. Similarly, roughly 7 in 10 of both private and public workers oppose cutting benefits to already retired government employees.
However, the two groups diverge over current government employees. Government workers also oppose (68%) reducing their own future pension benefits while private sector workers marginally favor (51%).
The reform that both public and private sector workers agree upon to deal with underfunded pensions is to increase government workers’ required pension contributions (65% of public employees, 88% of private employees favor).
Nevertheless, while government employees are willing to contribute more, they don’t think they should have to contribute at least 50 percent of their pensions costs with 53 percent opposed and 46 percent in favor. Conversely, 6 in 10 private sector workers find it appropriate for government workers to contribute at least half of their retirement benefit costs.
While increasing required employee contributions may help alleviate the underfunded pension problem, it will likely be insufficient. In these situations, localities may find their two options are to raise taxes/cut government services or cut public employee pensions. When the trade-offs are presented this way, private and public workers reach consensus:
Nearly three-fourths of government workers and more than 8 in 10 private sector workers would prefer to “renegotiate public employee contracts to reduce pension benefits and make current employees contribute more to their own pension” rather than raise “property, sales, and/or income taxes” or “reduce public services ranging from police and fire protection to recreation.”
Particularly striking, when given the choice between tax hikes/service cuts and reducing pensions for already retired public employees, both private (73%) and public (53%) employees oppose raising taxes to pay benefits at current levels. When it comes to government service cuts to pay benefits to already retired government workers, 57 percent of private sector workers oppose, but 52 percent of public employees would favor.
In sum, neither taxpayers nor government workers want to be responsible for fixing the public pension crisis. To be sure, public employees would prefer to not raise taxes or cut services for taxpayers and private sector workers would prefer not to break a contract made with government employees. Nevertheless, public employees tend to prefer policies that would keep taxpayers on the hook for dealing with the crisis, just as taxpayers want government employees to solve the problem on their own. However, when trade-offs are made clear and concrete: either tax hikes/service cuts or renegotiate government workers’ contracts to reduce pension benefits, both groups agree on the later.