The Real Cause of the Pension Crisis

| Wed May 11, 2011 1:56 AM EDT

In the Washington Monthly, Sylvester Schieber and Phillip Longman take a look at the historical evidence and conclude that the state pension crisis doesn't really have much to do with the demands of public sector unions. Rather, it's due to the incentives faced by elected officials:

The real cause of the crisis is the inherent conflict of interest politicians face when they have the option of handing out or maintaining pension promises to favored constituencies, including themselves, without the public understanding what’s going on and without the bills coming due until after they are gone from office. Politicians have two basic ways of doing this. First, they can, as Republican Christine Todd Whitman and subsequent governors of New Jersey did, simply stop contributing money to the pension fund or tap their credit card to pay the pension mortgage.

....Politicians can also make benefits more lush without coming up with the money to pay for them. That’s what happened in California in 1999 under Democratic Governor Gray Davis, when the state enacted the largest pension increase in its history—one that now has become the single biggest threat to the state’s continued solvency....The pension bill passed 39-0 in the state senate and 70-7 in the assembly, while barely making the papers.

....So this is the world as we find it. Government decisionmakers face an inherent conflict of interest when it comes to making pension policy for government employees, and so do their staffs. This is true whether or not unions are involved. Beyond the enticement of self-dealing is the temptation to self-aggrandizement that comes when politicians are allowed to take credit for delivering benefits whose full cost only becomes apparent after they are long gone. That all this can be done within a tight circle of insiders without the press or the public taking much notice only further perverts the logic of decisionmaking.

It's true that public sector unions have an inherent advantage that private sector unions don't, namely that the people they're negotiating with depend on them for campaign support, but this isn't the core problem responsible for out-of-control pensions. The core problem is that politicians always prefer to pay bills in the future, not the present. If they have a choice between giving firefighters a $10 million raise that will come out of the current year's budget vs. a $30 million pension increase that will come out of someone else's budget far in the future, it's a slam dunk. They'll take the pension increase every time. As Schieber and Longman note, California's 1999 pension rise was approved nearly unanimously by both parties and adopted by virtually every county in the state, including some of the most conservative ones. The dotcom boom had everyone bedazzled regardless of political affiliation.

So what to do? Schieber and Longman suggest that significant pension changes be treated the same way as large bond issues:

Let the unions and the politicians negotiate all they want, but if they come up with a contract that puts future taxpayers on the hook for the cost of making pension and other retirement benefits more generous, it should go to a vote of the people. If the people are feeling generous, or if they feel there is indeed a strong case for why public employees need more generous pensions, they may well go along. If they feel there are more compelling purposes for which they should be spending their own or their children’s money, they will not.

It's an interesting idea. By itself, it does nothing to address the existing problem, which makes is a bit like shutting the barn door after the horse has left. What's more, it also does nothing to force governments to properly fund pensions, one of the big reasons why we're in our current mess to begin with. However, solutions to the former are pretty hard to come by regardless and shouldn't stop us from addressing the future, while solutions to the latter could probably be incorporated into the referendum language with a bit of thought. It's worth some consideration.

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