Public pension costs deserve greater understanding, honesty
When it comes to the recent focus on the pensions and health care costs of public workers, there’s a mixed message — good news and bad news.
The good news is that we’re learning more about the issue, understanding the true costs of public employee benefits, mostly pensions and health care.
Taxpayers have begun to look at contract details, learning how much public employees contribute toward both their pension and their health care, compared with private sector workers. As more states struggle with budget deficits, taxpayers have begun to question retirement options for workers in their 50s for many in the public sector. The public is also learning how some employees game the system with overtime to boost their pension payments.
In some cases, taxpayers have also confronted the issue of accumulated sick pay, which in New Jersey found a handful of retiring police officers claiming lump-sum payments of $300,000 or more for unused sick pay.
So, public awareness of the public employee pension crisis is good news since a problem cannot be solved until people know about it.
The bad news about public pensions is that many experts are now saying the public pension crisis is worse than most people think, which is bad.
According to an article early this month in the New York Times, “several studies have shown that promises to workers are far more costly than routinely calculated by Wisconsin and most states.” Experts quoted in the article suggest that states and cities should shift their accounting methods for pensions to be more in line with how insurance companies calculate future liabilities.
One problem is rate-of-return assumptions for investments. Many experts believe that most states’ assumptions about stock market returns are unrealistically optimistic. But reducing the expected asset appreciation figure for pension investments increases the obligation that will fall to taxpayers.
One reasonable solution to that problem, being considered in several states, is to require workers to increase their contributions to their pension funds.
Another reason for public pensions being so burdensome is that many public employees can retire in their early 50s, a decade or more before the normal retirement age of 65. This early retirement option means that many former workers will collect pension benefits for as many years, or more, than they worked.
The percentage of a public-sector workers’ pay that is covered by a pension varies from state to state, and can create problems as well as raise issues of fairness. In New York, public pensions pay 77 percent of a worker’s final pay. And when Social Security is added in, those workers will be paid more in retirement than when they worked. This problem is compounded when those payments go on for more years than the person worked.
Most people have a problem with this — from both moral and financial perspectives.
Another problem with public pensions was highlighted by Microsoft founder Bill Gates, peaking at a conference in California last month. Gates said that states often use gimmicks to hide or cloud over pension and health care benefit costs. He said these gimmicks are “so blatant, so extreme” that “the guys at Enron never would have” attempted them.
Public pensions are considered ticking time bombs, threatening states and municipalities — and ultimately taxpayers. It’s important for taxpayers to know as much as possible about these financial obligations and the options to reduce their impact. It’s also necessary for states to be more transparent and more honest when it comes to revealing the costs of pensions and health care.
The public pension crisis will remain in the news, which is good, but that could mean more bad news for taxpayers.
