Minnesota’s Governor has an op-ed in today’s Wall Street Journal, arguing that the growth of public-sector unions presents a major problem for any small-government reformers.
Federal employees receive an average of $123,049 annually in pay and benefits, twice the average of the private sector. And across the country, at every level of government, the pattern is the same: Unionized public employees are making more money, receiving more generous benefits, and enjoying greater job security than the working families forced to pay for it with ever-higher taxes, deficits and debt.
Governor Pawlenty notes three principals he’d like reformers to consider. First, normalize pay between the private and public sectors.
Second, get the numbers right. Government should start using the same established accounting standards that private businesses are required to use, so we can accurately assess unfunded liabilities.
Third, we need to end defined-benefit retirement plans for government employees. Defined-benefit systems have created a financial albatross for taxpayers. The private sector dropped them years ago in favor of the clarity and predictability of defined-contribution models such as 401(k) plans. This change alone can save taxpayers trillions of dollars.
Our own Eileen Norcross champions both these policies. Her recent paper, The Crisis in Public Sector Pension Plans, co-authored with AEI’s Andrew Biggs, uses New Jersey’s public-sector unions as a case study for the growing government work-force. They also discuss the moral hazard inherent in defined benefit plans:
From the perspective of workers, defined benefit pensions in the public sector are risk-free; they are guaranteed benefits by the state, which has the power to tax. This means, of course, that from the perspective of the taxpayer, the liability is a near-certainty. The discount rate chosen to value future liabilities in the plan, therefore, should reflect the low-risk character of the benefits promised to workers.
From the government’s perspective, it is appealing to use a higher discount rate to estimate plan liabilities because it produces a lower annual contribution. By contrast, a low discount rate will result in a higher annual contribution required by the employer (in this case, the government) to fund pension obligations.
Eileen and Andrew were also part of a Mercatus panel discussion with Utah State Senator Dan Liljenquist, Scott Pattison of the National Association of State Budget Officers and Jim Musser of Mercatus. Today she also released another paper, Getting an Accurate Picture of State Pension Liabilities.
Last year I addressed the incentive for governments to gamble with public employees’ retirement savings in an op-ed. Giving public employees control of their own savings is essential for any kind of fair relationship between governments, their employees, and the taxpayers. An accurate accounting system is crucial to any fiscally responsible discussion.
Correction: In my AOL piece there is an error: I wrote “Then there was New Jersey Gov. Christie Todd Whitman, who from 1998 to 2003 held “pension holidays,” suspending employee payments into the pension system so workers could spend the money elsewhere. . . . Today, New Jersey’s public pensions lack billions of dollars in funding, and both public employees and taxpayers will suffer.” Instead, the piece should read “so employers“, i.e, the state of New Jersey, could spend the funds elsewhere. Thanks to reader John for bringing that misstatement to my attention.