Only two sorts of people survived the Great Recession with their retirement plans intact. The first were the handful of market geniuses who moved their portfolios to safety in late 2007, just before the crash. The second were … well, garbage collectors.
The public pension — the retirement plan that covers garbage collectors, as well as firefighters, judges, teachers, and state and local workers of all descriptions — is the last, most profligate manifestation of the pre-401(k) era; what financial historians call the golden age of retirement. The promise: Put in a couple decades in the public sector and typically by age 50 or 55 your financial cares would be over. Your pension income might reach 90 percent of your peak salary (70 percent is generally considered all you need to maintain your standard of living). Inflation? Don’t worry: your pension checks will rise to meet it. Market crash? No problem: it’s the employer’s job to make up any shortfall in the pension fund, and chances are your state constitution itself guarantees your benefits, no matter what.
The mismatch between the average worker’s post-crash retirement prospects and that of the average government employee has started to rankle voters. Olivia Mitchell, executive director of the Pension Research Council half-jokingly calls it “pension envy.” New Jersey’s new governor, Chris Christie, most assuredly not joking, played on that resentment in a tough-talking budget address this month, describing a 49-year-old retired state worker whose pension would cost the state $3.3 million. “Is that fair?” he thundered.
Now there are legitimate reasons some government workers might deserve a richer pension than you. Cops and firefighters, for example, can’t be expected to work until 65, and those who’ve risked their lives should be taken care of. Also, top civil servants are grossly underpaid by salary. Generous retirement benefits help even out that disparity.
But the real issue facing public pensions isn’t fairness. It’s solvency.
This month, the Pew Center on the States released a study of state pension plans that found a trillion-dollar gap between the retirement benefits states have promised their employees and what they have set aside to pay them.
A 12-digit shortfall is scary enough; the trend is even more so. In 2000 nearly half the states had fully funded pension systems. In 2008, only four could make that claim. Over the five years before 2008, nearly half the states failed to contribute even 90 percent of the amount needed to bring their plans into balance (or keep them there) over the long run. Worse, all these figures were compiled from June 2008 — before the crash wiped out an average of 25 percent of states’ pension assets.
How did things get so out of hand? It’s a classic mismatch between the short-term incentives inherent in politics and the long-term prudence required to run a sustainable pension plan. “One thing we know about politicians is, they’re delighted to make promises that will be paid at a later date,” says David John, senior fellow at the conservative-leaning Heritage Foundation. Ever more generous pensions are an easy concession to make to keep public employees happy. After all, there’s little political upside to daring transit workers, say, to go on strike when you’re running for re-election. Not when the full cost of sweetening a pension might not be felt for 20 years.
And especially not when it’s so easy to hide that cost. The eventual outlay for a pension depends on such unknowables as future salaries, life expectancies, rates of return on assets invested in the pension fund and so on. To estimate the cost, pension administrators make a variety of assumptions — which present politicians with an irresistible temptation to sugarcoat. “Pension costs are one of the easiest things for politicians to fudge,” says Gary Burtless of the liberal-leaning Brookings Institution. Assume your state pension fund will return 8.5 percent through 2030 instead of 6.5 percent and — presto! — your pension system is suddenly fully funded. That kind of gamesmanship helped states ignore the problem for years.
But now the game is up. The recession has squeezed every single state’s budget and forced lawmakers to choose between cutting essential services and maintaining retirement benefits that are more extravagant than what almost anyone else in their state gets. Already several states have acted to rein in costs, typically by raising the retirement age or even instituting 401(k) style plans for new hires. (But not every state: the Pew report cites eight — Alaska, Colorado, Illinois, Kansas, Kentucky, Maryland, New Jersey and Oklahoma — for having “failed to make any meaningful progress toward adequately funding their pension obligations.”) Fiscal reality is likely to overrule state employee unions and, even in some cases, constitutional protections. “State deficits are unsustainable, and we’re all waiting to see where the system breaks,” says William Gale of Brookings. “Out of all government services—education, health, justice, transportation, and so on—public pensions have the weakest claim on voters.”
So keep that pension envy in check. The states are coming to the same conclusion that corporations did a decade or more ago: They can’t afford to take on the funding and assume the risks of retirements that could last 30 or 40 years. Increasingly, that burden will have to be shared among all interested parties — employer, government and, most especially, workers and retirees themselves. In that respect it soon won’t matter whether you’re a garbage collector or regular 401(k) jockey. We’ll all be in the same boat.
Reporter: Temma Ehrenfeld
Eric Schurenberg is Editor-in-Chief of BNET, the CBS Business Network.