The Troubling Pension Issue

The public sector is pretty much the LAST vestige of the Defined BENEFITS Plan, or pension programs. The private sector gutted them, often incentivized to gut them by the government, in exchange for bailouts, etc.

TODAY, dozens of states are groaning under the weight of pensions and benefits for retired workers who are living longer AND collecting record amounts in benefits. Many localities now routinely spend MORE on retirees than they do on their Municipal workforce.

Pensioners understandably dig in and claim, “A deal’s a deal,” but the truth is there are a number of ways that government can get “out from under” the pension burden.

There’s the direct way, or “frontal assault,” as we’ve seen across the nation, with varying results, a tactic now being considered in California, where a ballot measure campaign to cut that state’s public pensions will be launched in May by a coalition of politicians and business people led by former San Jose Mayor Chuck Reed, with the state's largest retirement system a prime target.

The measure would take aim at California's $300 billion giant Calpers, which has a near-iron grip on that state’s pensions. Calpers is America’s largest public pension fund and administrator of pensions for more than 3,000 state and local agencies, and it has long argued that pensions cannot be touched or renegotiated, even in bankruptcy. 

Now that frontal assault on public pensions is a tough sell, especially to the legislators and judges who hope to collect their own pensions at taxpayer expense someday, and on that score public pensioners nationwide know that a breathe a sigh of relief.

BUT that isn’t the ONLY way that government can get “out from under” the ponderous burden of pensions and benefits costs. There’s a slower, more insidious way and it’s been done forever. In fact, it’s the traditional way that governments slowly dissolve such debts. It’s called inflation, or “inflating the money supply.” More currency in the system = money that is worth less.

A 1997 New York Daily News article compared cops and firefighters of that day to those a quarter century earlier (1972). Whereas in 1972, an NYPD cop or FDNY firefighter earned appx. $12,000/year, their counterparts in 1997 earned a seemingly staggering $72,000/year!

But there was ONE catch...a BIG one, the 1997 New York City (NYC) cops & firefighters had 1/3 LESS purchasing power than their cohorts of a quarter century earlier. To put it more clearly, that $72,000 in 1997 U.S. dollars was worth just $8,000 1972 U.S. dollars. In reality, those 1997 New York City workers took a 1/3^rd pay cut between 1972 and 1997!

Pensioners took the BIGGEST hit. Even a cop retiring in 1972 on disability, with 3/4s of his final year tax-exempt, would rake in but $9,000/year by 1997, prompting others of that day to truly ask, “How can you live on that?”

We’ve had decades now of incredibly low inflation, but a cursory look at the Municipal books would seem to indicate that another wave of well-timed inflation.

Today, dozens of New Yorkers are receiving pensions in excess of $200,000/year. Sounds great, but a couple of decades of just 5% inflation would erode even those seemingly lofty amounts to pauper’s wages. Just as the 1972 era NYC cop or firefighter were paid their pensions in the “cheaper dollars” of each succeeding year, so too will today’s pensioners be paid in ever cheapening dollars as well, until one day, today’s “HUGE payouts” will appear as quaint as 1972’s pension payouts in 1997 dollars.

The best, perhaps ONLY “hedge” against that, is an investment in yourself. Staying healthy, active and looking to remain productive and engaged throughout your life, because there’s just so much we cannot count on any more.