David Cay Johnston, the Pulitzer-prize winning tax-beat reporter now writing for Tax.com, finds the idea of making state workers "contribute" to their pensions to be nonsensical:
Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.
How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash...
Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.
In one sense, he's right: total compensation = current compensation + deferred compensation. If you reduce the deferred amount, you reduce the total, so you get a "pay cut." Unfortunately, the way state politics and government pension accounting have worked together, there has been a break in the trade-off between current and deferred compensation. The deferred part has been treated like free money. This is the result of three things working together:
- The continued use of defined-benefit pension plans for government employees. These are nearly extinct in the wilds of the private sector.
- The loose standards used in measuring and funding the future public pension obligations.
- The ability of the public sector unions to choose their negotiating partners by getting their friends elected.
If the states used the defined contribution model, like the private sector, the government employees would retire based on the amount of retirement pay that has funded, rather than an amount that has been promised. Defined contribution plans impose the trade-off discipline that Mr. Johnston invokes -- you either fund wages now or you fund retirement now. Because defined contribution retirement pay increases require immediate tax boosts or spending cuts, this is not a popular model with politicians and public-sector unions.
The discipline breaks down with government defined benefit plans because there is no right-now trade-off. You can promise a higher future benefit without boosting taxes or cutting other spending today by means of optimistic actuarial assumptions. Just pretend that pension funds will always earn 8% or higher annual returns, and maybe that retirees will die off quickly. Sure, you create a funding time-bomb, but that's for somebody else to worry about in another election. There's no incentive for the unions to exercise discipline, and the politicians, largely union-funded, have been willing to bet on the actuarial equivalent of filling out a straight flush to please their funding friends. To the extent there has been any trade-off, it has been a a trade of promises of future pensions for future tax increases and/or spending cuts -- promises billed to tomorrow.
Tomorrow's here. Government defined benefit funding deficiencies range from serious to catastrophic (Illinois, California). By having some current compensation diverted to fund their retirement plans, Wisconsin employees are finally facing Mr. Johnston's theoretical trade-off in real life.
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