June 7, 2009

Public Pensions at the Fore

Monique Chartier

This is a rare, fortuitous instance in which one ProJo article answers another.

On Friday night (an interesting day in itself to hold a hearing), state and local public employees flocked to the Statehouse to advocate for no changes in pension benefits.

Public employees packed a State House hearing on Friday in an eleventh-hour effort to head off pension cutbacks, with Patricia Hines asking on behalf of school principals across the state: “What message does this send about how Rhode Island values education … if veteran educators, who devote their entire careers to educating R.I. youth, will have to worry about how they will get by in their elder years.”

And Kathy Gregg's article in today's ProJo should have been titled "Public Pension Extreme".

At least 48 retired state workers, teachers and judges who left government service in the last two decades have pensions that now pay them between $100,528 and $190,352 a year.

With years of 3-percent annual cost-of-living increases, some are receiving pensions that pay them far more than the salary they made when they were still working.

The point, of course, is not that these forty eight pensions by themselves threaten the pension fund, though they don't help, multiplied as they are by decades and COLA's. It is rather that they are major red flags of a system badly in need of reform. The same "reasoning" that spawned the borderline criminal practice of allowing a few soon-to-be retirees to buy credit into a system to which they never belonged also hatched the idea of excessively generous retirement benefits for all. PDF courtesy RIPEC.

● Based on a recent comparison among New England states, Rhode Island’s State employee pension system (Schedule A) appears to be more generous due to the availability of early age retirement without penalty and the program’s 3.0 percent COLA that is applied to years of service; and

● Even with changes made as of July 1, 2005, Schedule B participants still receive the 2nd highest pension for retirees in New England, assuming retiring at age 60 with 30 years of service, and a final average salary of $70,000.

And the fact that

contribution rates paid by state workers and teachers are already among the highest in the nation

is only a further indicator that something is out of order. Higher contributions all around are necessary when benefits are disproportionately high.

Worse, these pension benefits were for many years represented by elected officials to public employees as feasible and sustainable. The education process now underway that promised benefits are, in fact, the opposite, a situation exacerbated by the General Assembly's proclivity over the years to send insufficient dollars to the pension fund, is understandably difficult and painful. The only course that would be harder, however, is that of inaction.

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Let's not forget reality in the private sector. Seven years to make up an unfunded deficit. Corporate earnings and cash flows available for shareholders getting completely slammed by this. More and more companies with DB plans looking and acting like pension plans with a sideline in making things for sale to third parties. And if the company tanks, the PBGC sharply cuts the pensions above their relatively low maximum benefit levels (ask any airline pilot what this means). That's reality for those American workers lucky enough to still have a DB plan. For everyone else, its Social Security (even if they keep raising the retirement age from 67 to 70, its better than nothing) and scrimping to make contributions to a 401k -- and hoping you invest prudently.

The public sector unions' idea -- in RI, California, NY, NJ and elsewhere -- that we should endlessly raise private sector taxes to fund their excessive retirement and post retirement health care benefits is completely insane. As Herbert Simon said, what can't continue, won't continue.

Posted by: John at June 8, 2009 7:01 PM
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