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Pensions Aren’t the Problem

How not to balance state budgets.

Mar 28, 2011, Vol. 16, No. 27 • By ELI LEHRER
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In the end, many states facing very large current budget gaps—New York, Florida, Texas, and Wisconsin among them—have pension systems that are likely capable of paying their obligations indefinitely with only minimal tweaks. Even in California, where absurdly generous public employee pensions have attracted enormous media attention, both of the major pension funds have shortages of around 10 percent that the state could cover pretty easily with some combination of economic growth, tax hikes, and service cuts, if its other fiscal problems were not so severe. 

Given that pension systems are not all that expensive, very difficult to change, and in better shape than some assume, there’s a strong practical case for directing budget cutting attention elsewhere. State and local governments also have a strong comparative advantage relative to private industry in offering pension benefits: State governments never go out of business and can count on rising gross revenues so long as their populations grow. (All states but Michigan grew between 2000 and 2010.) As a last resort, they can usually assure themselves more revenue with a tax increase. 

In principle, therefore, state governments are much better positioned to offer pensions than the typical private corporation and can offer them more cost effectively. Since many of the most common government jobs—firefighter, police officer, corrections officer, regulatory overseer—have no direct private sector analog, the lifetime-with-one employer career path scorned by many in the private sector makes a lot of sense for government employees. The real savings for government are likelier to be found in cutting salaries and other benefits. There would still be political obstacles, of course, but not constitutional ones, and the savings would be immediate and potentially much larger.

This doesn’t mean that states like California that allow office workers to retire at full salary at age 50, encourage “double dipping” (letting employees collect more than one state pension, as happens in Florida) or calculate pensions in ways that guarantee employees retirement incomes higher than their working salaries should continue doing so. If nothing else, letting public employees live high on the hog as taxpayer incomes stagnate is deeply unfair. 

But pensions, all-in-all, have been more a target of opportunity than anything else. States and localities intent on budget-cutting would do well to crack down on “Cadillac” employee health care plans (which cost, on average, more than twice as much as pensions), much-longer-than-private-sector vacations, and high wages paid to mediocre civil-service workers who cannot be fired.

Eli Lehrer is vice president of the Heartland Institute.

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