The Good Life: Pensions for Life Threaten Taxpayers

 

Back in the day as young college graduates, most of us would not consider getting a job with any government agency.  For those of us with freshly minted accounting degrees, the last sort of job we wanted was with a place like the Internal Revenue Service.  First of all, they paid less than a big eight accounting firm or a large corporation and they definitely weren’t prestigious.  Yes, we heard all about the health care benefits and the pension, but our question was who needs that?  We were young and retiring was a long ways off.

Flash forward about 30 years, and the IRS isn’t looking too bad and government pensions for state employees look pretty good as well.    As a matter of fact, many who went the corporate route may be feeling a twinge of regret that they didn’t go work in the public sector in the wake of job and benefit losses in the private sector.  But it may very well be that government workers join them in their sadness as change may be coming their way as well.

Let’s talk about pensions here for a bit of background. Broadly, there are two types of pension plans one can have:

Defined Benefit: This is as the name implies.  Your benefit is defined as say, $ 5,000 a month for the rest of your life upon retirement.  Generally, no matter what happens, the employer has a commitment to make the promised payment.

Defined Contribution: This too is as the name implies.  Your contribution to your pension plan is defined rather than your benefit.  This means that if something occurs where you lose the money in bad investments, that there’s no assurance that you’ll get any money in retirement.  Your typical 401(k) plan fits here.

Defined benefit plans are far more expensive for employers than defined contribution plans mainly due to people living a lot longer.  Given this and the concern that the private sector has about profits,   they’ve tended to replace defined benefit plans with defined contribution plans while governments have done the exact opposite and have maintained these plans.   If you want a pension for life, you’re generally best off working for the government and that is the crux of the regret felt by those who are in the private sector.

But on top of that regret will be another feeling—resentment as everyone faces higher taxes to provide public employees benefits that most taxpayers themselves do not enjoy.   State budgets are under pressure and the source of a lot of the pressure are their defined benefit plans.   The swoon in the stock markets has created some very sizeable funding gaps in their defined benefit plans and many states are struggling to close the gap even as taxes revenue plummet in the Great Recession.

Just how rich are these benefits?  Well, I can speak from personal observation on this.  I know a couple who retired from state government positions who are getting $130,000 in pension benefits for life and get social security and free health care for life on top of thatBetween the pension and social security, they’re pulling nearly $ 200,000 in retirement for life.   These people happen to have retired from the state of New Jersey.  (Just to put this in perspective, median family income in the US is about $ 60,000.)  To be fair, $ 200,000 is not a lot of money in a high cost state like New Jersey, but a retiree doesn’t have to stay there.  So with outmigration, a state might not only pay out the benefit, but miss out on clawing back some of the pension via taxation because the retiree moves away.

What we have here at the state level across this nation is a public pension tsunami and for  states like New Jersey and  California, it’s the single biggest issue that threatens solvency.  Here, closer to home in PA, Rendell’s recently proposed sales tax expansion fails to deal with this issue as well. 

It’s politically untenable to tax the citizens to provide benefits they themselves will never have especially since promises made to taxpayers for social security will ultimately be broken.  This will be a huge issue shortly.   These promises too will need to be broken and broken quickly if states hope to remain fiscally solvent.   It’s time to level with the people across the board on a great many things.  That takes backbone which is in short supply among American politicians.

 

 

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Comments
2 Responses to “The Good Life: Pensions for Life Threaten Taxpayers”
  1. crisismaven says:

    You paint the right picture: on paper these people are well cared for, however, when their dear government goes bankrupt, not only will they have helped in its downfall, they will then also be much worse off than people who worked productively.

  2. Greg L says:

    Exactly Crisis, exactly and this is what we’ve got to get to–productive engaged citizenship across the board. In a way, there’s a silver lining in any crisis as if things get bad enough, one ultimately has to take their measure by looking in the mirror. There’s a collective image staring back at America and many don’t want to deal with it, hence the obsfucation rather than straight up leveling with the people.

    I traveled to Michigan today and caught a headline on what MI governor is doing to close that state’s budget gap and it’s a variation of PA; lower the sales tax rate and broaden it. These people must have had the same financial consultant and I’m betting that this set up will be repeated nationwide. This still doesn’t address the fundamental problem of closing the funding gap on public employee retirement plans; just more smoke and mirrors to put off the day of reckoning

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