I will protect your pensions. Nothing about your pension is going to change when I am governor. - Chris Christie, "An Open Letter to the Teachers of NJ" October, 2009

Saturday, February 26, 2011

Why We Are In This Mess

Take a look at what Sue Urahn, an expert on the subject at the Pew Center on the States, has to say about this when describing the $1 trillion gap that existed between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.at the end of 2008-
To a significant degree, the $1 trillion reflects states’ own policy choices and lack of discipline:
  • • failing to make annual payments for pension systems at the levels recommended by their own actuaries;
  • • expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
  • • providing retiree health care without adequately funding it
That is the point. While the governor of Wisconsin is busy trying to shift the blame to the workers in an effort to put an end to collective bargaining, the reality is that it was the state who punted on this – not the employees.
Further, by the state employee unions agreeing to the deal proposed by Walker on their benefits (as they have despite Walker’s refusal to accept it) they are taking on much  - and possibly all – of the obligation out of their own pockets.
As a result, the taxpayers do not contribute to the public employee pension programs so much as serve as insurers. If their elected officials have been sloppy , the taxpayers must stand behind it. But if the market continues to perform as it has been performing this past year, don’t be surprised if the funding crisis begins to recede. If it does, what will you say then?
The real question - the one even so called "liberals" seem loathe to ask - is why the states punted on collecting enough revenue to fund these obligations.

The nonsense answer being pushed by the right-wing these days is that unions have bought and paid for the state legislatures, and demanded unsustainable compensation (I refuse to call it "benefits" anymore). Sorry, but if that were true, public workers wouldn't be making less than similarly experienced and educated private workers. 

No, there are three main reasons why the states and localities didn't collect enough:

1) Health insurance costs have been allowed to skyrocket with absolutely no checks. We pay two to three times what every other industrialized nation pays for health care and we get worse results. Solving this outrage alone would probably have been enough to fix our current fiscal nightmare in the states, and would have gone a long way toward solving our federal mess as well.

But that would mean less money for the health care industry, which gives tons of money toward political campaigns.

2) The wealthiest 1% of Americans have basically taken all of the economics gains made over the last 20 years. Raising revenues means taxing them, not the middle class. Yet they are overwhelmingly represented in our "democracy":

There's simply no way we will raise taxes on the rich - who have all the money - if they are the ones who control our government.

3) The push away from pensions - defined-benefit plans - and toward defined-contribution plans (401k's, IRA's, etc.) is all about enriching Wall Street:
Individually managed accounts like 401(k)s violate a basic tenet of economics – specialization increases economic gains. That is why the average investor makes much less than the market return, studies by Morningstar show.

This goes to Adam Smith's famous insight in 1776 about specialization increasing wealth: when pins were made in full by each worker each could make only a few each day, but when one person draws the wire, another cuts, another fashions the point, etc., the output rises to tens of thousands of pins and their price falls from dear to cheap.

Expecting individuals to be experts at investing their retirement money in defined contribution plans -- instead of pooling the money so professional investors can manage the money as is done in defined benefit plans -- is not sound economics. 

The concept, at its most basic, is buying wholesale instead of retail. Wholesale is cheaper for the buyers. That is, it saves taxpayers money. 

The Wisconsin State Investment Board manages about $74.5 billion for an all-in cost of $224 million.

That is a cost of about 30-cents per $100, which is good but not great. However it is far less than many defined contribution plans, where costs are often $1 or more per $100.
And who gets that extra 70-cents? Duh.

Wall Street, the health care industry, and the wealthiest individuals have all benefitted enormously from the fiscal mess the states are in. If they get away with this attack on public workers, no one will have any incentive to work in the public sector anymore. It may take a few years, as the barriers to entry in fields like teaching are very high, and there will be some teachers who choose to stay in the profession and adjust their lifestyles to make up for the massive loss in compensation they will be taking.

But that can't be sustained. Public education will die, which is fine by the rich, as they will move their kids into private schools that don't use standardized tests and have small class sizes and lots of curricula in subjects other than reading and math and many, many co-curricular opportunities.

Everyone else will be trapped in schools with underpaid teachers who are the slaves of standardized testing. But you know what?

Even then, the states' fiscal crises won't be solved. Taxes will still be regressive, health care will still cost more than the middle class can afford, and retirements will be mean and brutal.

Does it have to get that bad before people wake up?

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