Ya gotta love these public employees and their unions – especially the teacher unions. They use raw political power and loads of campaign cash to elect compliant legislators and school board members who raise no objections to benefit packages that are far more generous than what private sector employees receive.
Unfortunately those compliant (in other words, weak) men and women who they’ve helped elect fail to adequately fund all those wildly generous benefit packages.
Obviously the public sector union employees think the state constitution means future taxpayers have to make up the difference. Except that’s not what the Illinois Constitution says. Read it yourself here. Future taxpayers were not involved with those contracts.
Some people might think that’s the implication. And they might even think it’s moral for future generations to pay for all those bloated pensions. But they’d be wrong on both counts.
For one thing, the state constitution can’t guarantee the impossible. There is no fair or reasonable way to come up with all that money. For another, the pension system for state employees doesn’t actually meet the definition of a pension system. Pension systems are designed to transfer resources from working life to postretirement life.
The philosophy is simple – funds are set aside today and invested appropriately to support future consumption in retirement. Pension plans are pay-as-you-go systems. What we have in Illinois is not such a system. Instead, it’s a social insurance scheme rigged by powerful state employee unions to be a Social Security like system on steroids.
As I’ve noted, there is mounting opposition to this nationwide scam. Many think tanks and a growing number of informational websites are outlining just how ludicrous the situation is in many states.
What follows are a few excerpts from recent worthwhile articles on the topic.
“Today’s [public] pensions system [are] unfair to private-sector workers, who suffer a triple whammy. First, most are now enrolled in riskier defined contribution (DC) pension schemes, where payouts depend on investment performance. Second, employers make smaller contributions to DC schemes than to final-salary plans, so pensions are likely to be lower. And third, as well as shouldering more of the burden for their own retirement, private-sector workers pay for public-sector pensions via their taxes. There is, in effect, a hidden transfer from private-sector workers to their public-sector peers.”
What do pensions have in common with AIG?
“What do pensions have in common with AIG? It turns out a lot. Both were claiming to run a core business when in reality they were fueling a Ponzi scheme using “sophisticated instruments” or “alternative investments” that threaten the security of the global financial system. That’s why AIG’s dismal results back in August spelled trouble for pension funds.
Just like AIG, most pension funds lack transparency, allowing them to operate beyond the reach of regulators. Moreover, there is no accountability or serious risk management taking place at any of these large pension funds, allowing senior managers to reap huge bonuses for taking excessive risks (typically by beating bogus benchmarks in private markets).
And just like AIG, when their financial solvency eventually reaches a breaking point, these pension funds are going to require billions, if not trillions, in bailout funds to allow them to meet their pension obligations.”
The Big Public Pension Squeeze
The cost of public sector pensions is set to soar in coming years because the recent meltdown in the financial markets has worsened the health of systems that were already badly underfunded. Municipal and state governments across the country are struggling with massive budget shortfalls, leaving them in no position to fill the pension gap. As a result, public workers look likely to bear the burden through cutbacks in their salaries and benefits and increases in their pension contributions.
‘No one can isolate themselves from the effects of the economy,’ Gray Davis, the former governor of California and currently counsel at Los Angeles law firm Loeb & Loeb, told Institutional Investor in a recent interview.
Pension benefits enjoy constitutional or statutory protections in many jurisdictions, and reducing them may not be easy or straightforward. But analysts say governments can use a variety of means — freezing or cutting salaries, requiring higher pension contributions, delaying retirements and reducing retiree health care benefits, among others — to yield immediate budget savings and dramatically reduce pension costs in the long run.
‘The majority of the pain will ultimately be borne by people who will see their pensions cut,’ says Jacob Funk Kirkegaard, who studies pension issues at the Peterson Institute for International Economics in Washington.
©2009 John F. Biver