The Looming Pension Crisis
States, counties, cities, and other public entities face huge deficits in pensions and promised health care benefits that cumulatively add up to trillions of dollars. Detroit’s bankruptcy was fueled to a large degree by its pension and health care shortfalls, with billions owed to its workers and retirees that were not supported by adequate funding. All of the major cities in the country and many of the states also face future deficits of varying degrees that are not being properly addressed. While the focus may be on the national debt of the federal government, the failure of cities and states to fund the pensions and health care benefits of public workers may present an even greater problem. How did we get into this mess?
There are actually a number of factors behind this crisis, generated from irresponsible behavior by politicians, workers, and public employee unions. In order to get the support of municipal and state workers and their unions during elections, politicians made outsized promises to them regarding early retirement, pension and health care benefits.
Policemen, firemen, and some other municipal employees such as sanitation workers were allowed to leave early and receive major benefits at the time of their exit. This meant that some of these employees retired in their early to mid-forties, were given most or all of their wages, and then could work at other jobs that also paid them. Admittedly, the work they performed was dangerous, but unless they were on disability, their retirement benefits should have kicked in at sixty-five, particularly if they were working at a second job. Certainly, many of these men could have ontinued working for the cities or the states in their original jobs, perhaps retiring after thirty years of service with their benefits.
The cost of these benefits has only increased as life expectancy has grown and will continue to rise in the future if benefits are not curtailed. Contributing to the high costs is the fact that many public employees did not have significant deductibles with their health insurance and did not have to contribute to the health insurance premiums and pensions in many instances. This is in contradistinction to their brethren in the private sector. (Recently, there has been some movement towards having public employees pay deductibles and contribute to premiums and pension plans, but there is still a long way to go to match private industry.) Of course, the workers were only too happy to accept the benefits they were offered, often obtained by their unions after bargaining with elected officials.
Once the politicians made the financial promises to the state and municipal workers to get their backing in elections, they did whatever they could to delay adequate funding of these obligations. To avoid raising taxes to pay the necessary funds to the pension and health care plans, which would alienate the electorate, they found ways to fudge the payments, knowing that they were kicking the can down the road. Unreasonable assumptions were made in terms of investment returns so that contributions to health care plans and pensions could be lowered. Other politicians would have to find ways to meet the obligations, or the benefits would eventually have to be reduced.
The shortfalls in the municipal and state pensions and health care plans are a testament to the fact that the system in place is not working. Independent boards of actuaries, accountants, economists, and investment advisors are needed to determine what realistic returns are and how much is needed in contributions from the states and municipalities for the various pension and health care plans. It would then be up to the politicians to decide on how to meet these obligations, raising certain taxes, or fees if it were necessary. Or they could take the opposite tack and negotiate reduced benefits so that less funding would be required. But something has to be done rather quickly before more municipal bankruptcies occur.
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