A Bill That Never Gets Paid

Hard to argue the upcoming pension bill will hurt towns if they don't actually pay it:

TRENTON — Local governments and school districts will see their pension bills climb by 8.9 percent next year, according to figures released today by state Department of Treasury. 

The steep rise follows an even bigger 22 percent increase in the local pension bill for 2011. State Treasurer Andrew Sidamon-Eristoff said the increases underscore the need for lawmakers to pass the pension reforms proposed by Gov. Chris Christie.

"Without passage of the governor’s reform package, local taxpayers will put almost $1 billion more into public employee pension funds over the next five years," Sidamon-Eristoff said. "The cost of local pension contributions in 2011 and 2012 illustrates again the high cost of doing nothing about pension and benefit cost inflation." 

Why should this year be any different? Just don't pay it. It's worked out so well up until now...

Let's look at Dean Baker's chart again, shall we?

As Krugman says:

The basic moral is that the official story these days — of years and years of huge giveaways to unions, resulting in gigantic, unpayable debts — is just wrong: to a very large extent, the pension shortfall has emerged just since 2007, thanks to the financial crisis, and even then it’s not nearly as big relative to future state incomes as widely imagined. 

Baker has more to say here:

When I was in grad school economists would get up there and tell you here's why companies and governments have defined benefit pensions. If you have basically an infinitely "live" entity -- a company that you expect to stay around forever or a government that you expect to stay around forever -- they can afford to go through periodic downturns in the stock market. Even a prolonged downturn, three, four, five years, isn't in any obvious way a big deal for the state of California or Montana or whatever. Whereas if you or I are hitting our retirement and we want to cash out and the stock market is down, that is a big deal.

So the logic is that you have an entity that is essentially indifferent to risk in the short-term, and an individual that cares a great deal about risk at a specific point in time. So what the company can do or the government can do by offering a defined benefit pension is give something of great value to workers at very low cost to itself and in principle that is supposed to lead to lower wages than they would otherwise have to pay. And all this is just the straight neoclassical economics. Workers are getting something of value that costs the company or the government very little so they are willing to accept somewhat lower wages than they would otherwise get.

This is exactly he reason the promises made to workers and retirees need to be kept. By accepting deferred compensation, public workers have kept taxes low. Abandoning defined-benefit pensions will, in the long run, shift the burden for paying wages away from the market and towards the taxpayer. It's an incredibly short-sighted plan.

And it's probably irreversible. When the word goes out to young people choosing careers that the promises the potential government employer makes to them can be broken at will, they will simply not choose to enter public service. Why accept deferred compensation when it can be taken away at any time?

I've said this before, and I'll keep hammering it home: what Christie, Walker, and the rest are doing is the sort of damage that cannot be undone. They are destroying the teaching corps, and the damage will last far, far beyond their terms. Further, they are abandoning compensation strategies that saved the taxpayer money in the long-term.

It will probably be a good ten years before this starts to hit home. I hope President Palin will have a plan to deal with it.