What’s the Democratic Agenda for Pensions?

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Here’s the basic dilemma for Democrats on pensions as I see it:

On the one hand, 401(k) style plans don’t work. Some people want to make this a moral issue about personal responsibility for saving, but if you actually look at what works and what doesn’t in this area, it’s pretty clear that it’s just not possible to have a successful retirement savings program without some kind of coercive component. You either need a system where the government automatically withholds some of your current earnings and writes you checks when you’re retired, or where they force you to save. What definitely doesn’t work is giving people savings accounts and then leaving them to their own myopic devices.

On the other hand, the main reason to be a progressive is that the world needs high quality public goods and services – things like public safety and public health, the criminal justice system, education, environmental protection, and services for the poor. It will be harder to provide those services if more and more of the state budget starts going to compensation for retired people, and less and less revenue goes to providing the actual services in the present.

It is not public employees’ fault that politicians screwed this up so badly, as Steve Esack reminds us:

The retirement systems were not always in the red. In the late 1990s, the systems were flush because Wall Street was booming. With investment money pouring into the systems, the Legislature voted and Gov. Tom Ridge endorsed a measure to allow the state and school districts to stop contributing their shares. Employees made theirs.

While the state’s contributions were frozen, state lawmakers gave themselves a 50 percent pension hike, and a 25 percent hike for state workers.

Then the market tanked and pension debt grew. In an attempt to fix part of the problem, Gov. Ed Rendell and the Legislature passed Act 120 in 2010. It changed benefits for future employees by lengthening the number of years before they can be “vested,” and by increasing the retirement age to 65, among other changes.

The unfunded liabilities and new costs add up daily. The public school system now is short nearly $26.5 billion. The state workers system has a $14.7 billion deficit.

So the pensions are underfunded by about $41 billion. Eric Boehm says it could end up being as much as $70 billion. For some context, the budget this year was $27 billion.:

With the proposed reforms, the unfunded liability will continue to grow, but will peak at about $62 billion in 2018 – and then only if changes to both new and current employees are enacted, according to Corbett administration projections.

The worst-case scenario would be passage of lower contribution rates without the long-term reforms, a scenario that would push the unfunded liability to as much as $70 billion.

Now this will probably set off a wonk fight in the comments over assumptions about growth rates and the revenue projections in the Corbett budget, and I’m happy to be persuaded that things are better or worse than the PA Independent is reporting, but I think it’s fair to say that we owe a lot of money, around 2-3 times as large as the state’s annual budget.

So I have to disagree with Rich Wilkins that underfunded pensions are not a problem. If we don’t want payments to retired workers to begin crowding out the budget for current services and current workers, then we are going to have to engage on this issue. We are going to have to engage because if we don’t, the Republicans are probably going to succeed in switching people to crappy 401K-style plans. In the absence of a Democratic alternative solution, we’ve already started to see Democratic Mayors line up behind Republican solutions out of desperation.

The Democratic solution doesn’t have to do benefit cuts. It could be an all-revenue plan. There’s almost $5 billion a year worth of tax expenditures and weak claims we could cut and use to pay for pensions.

Pension payments are scheduled to increase to about $3 billion a year in 2016, up from $1.1 billion now. So basically we need to find another $2-3 billion a year, through some combination of cuts and new revenues.

This shouldn’t be that hard. PennFuture identified $2.9 billion in fossil fuel tax subsidies per year that we could cut. Why can’t that be the Democratic plan? It’d be worth doing on the merits, and it would shut down Republican excuses for defined-contribution plans and benefit cuts. They would no longer be underfunded and there would be no compelling reason, other than hostility to public employment, to dramatically restructure them.

This entry was posted in Miscellany.

One Response to What’s the Democratic Agenda for Pensions?

  1. Can Democrats even stand in the way of Corbett’s Pension plans? As long as moderate Republicans remain terrified of Tea Party Primaries for showing bipartisanship over ideology we will remain on this roller coaster.