The Unsustainability of Pensions
There aren’t a lot of cases where I find myself in agreement with Ezra Klein on economic issues, but on pensions, I think he may have nailed it. For those unfamiliar, pensions are little more than a way to say “I’ll gladly pay you tomorrow for a hamburger today”. Employees often take a smaller paycheck now so that they can collect income after they retire or leave their position. Unfortunately, the arrangement allows for a lot of lying and number fudging along the way.
As Ezra Klein points out, the biggest lies are coming from managers and union bosses. Managers have an incentive to push their compensation costs long into the future (likely after their own retirement) to keep short-term costs down. On the flip side, union bosses can crow about a better pension plan without having to actually show a single dollar in gain for employees right now. All the while, these employees are living longer than ever pushing the amount of time to be making payments even further out. It’s a game of “kick the can” that forces someone else to deal with the inevitable problems of actually funding those obligations.
A small glimmer of hope is that most pension plans are funded and backed by actual money. Unfortunately, the quality of the backing can often be suspect. Pensions depend on the employer both adequately funding the pension fund and properly managing it to meet future financial obligations. In both public- and private-sector pensions, the temptation is to worry about funding it later to either keep operating capital or, in the case of the public sector, keep taxes artificially low. Given that pensions are often seen as a way to realize short-term cost controls, can we be too surprised when an employer takes a similarly short-sighted view of the eventual day of reckoning that must come?
The real losers in all of this are the employees who are being promised things that won’t happen and the taxpayers who are often asked to be on the hook for those unfunded liabilities, both public and private. Given the huge short-term benefits and demands of both stockholders and taxpayers for immediate results, it’s hard to fault the people in a position of power for kowtowing to those demands and make it someone else’s problem. When Senator Dan Liljenquist says that “reality is not negotiable”, this is the kind of stuff he’s talking about.
As much as it will sting to acknowledge that the era of cushy pensions is over, employees and employers need to own up to that fact. Utah has already taken in lead in moving new employees to using defined contribution plans. Instead of the state managing a fund and having to come up with the difference should the fund fail to cover liabilities, this responsibility is shifted directly to the employee. That’s the only change: there are no socialized losses under such a system. This means the state pays their contribution to the employee’s retirement and is no longer involved.
This sounds like a win just for the employer side, but it’s also a win for the employee. It entirely removes the unpredictable “IOU” nature of the pension and puts them fully in control of their own fund. That money is theirs and is fully portable as they see fit. It also doesn’t allow managers or unions to play a game of three card monte with their compensation, shuffling off the hard decisions decades down the road with no liability for the consequences.
I’m sure it’s no surprise that the other employer benefit created during World War II wage freezes, health insurance, has been similarly ailing. At least with pensions, we’re doing something about it.