PENSION REFORM -- October 27, 2010 at 4:10 PM ET
Pensions Pose Major Challenge for Governments Worldwide
From France to San Francisco, pension reform is hot. What once was an arcane, wonky topic has become a political and social flashpoint in elections and - as in France - in the streets.
Across the nation, 19 million active and retired firefighters, police, teachers and other state workers are owed so much money that state and local governments are fearful of going bankrupt. In San Jose, Calif., the mayor has said it costs $180,000 a year to employ a firefighter or a cop. And they can retire at 50, sometimes making more than they did while on active duty.
Sure, most of the public-sector retirees get a reasonable, well-deserved pension. But the costs of those, plus high pensions and early retirement -- especially for police and firemen -- are threatening to eat away at other services that governments provide. Researchers from Northwestern and the University of Rochester say that the total states' pension shortfall may be as much as $3.4 trillion, and that doesn't even include municipalities.
A study released just this month by the independent Milken Institute - an economic think tank -- says that California may have pension liabilities of 5.5 times the state's annual tax revenue within two years, despite the fact that the Legislature just passed a new pension reform law, which was signed with glee by Gov. Arnold Schwarzenegger. In fact, 16 states have recently passed some version of pension reform.
In California (and in most of the other states), the new law will help only a little, because it applies only to newly hired state employees. Lower benefits and higher employee contributions to the pension fund don't affect those already retired or those currently working for the state. They have - in effect - a contract with government that defines their benefits, a contract that can't be broken.
So California has a pension debt of $550 billion, and revenues of $85 billion, according to David Crane, Schwarzenegger's point man on pensions. He says the reforms are a "great start," rolling back benefits to levels before a generous Legislature raised them in a prosperous year, 1999, and ending spiking. That's where a state employee works a lot of overtime in his last year before retirement, gives up his vacation and sick leave, and then has his pension pegged to his final working year. That practice resulted in huge pensions for some law enforcement workers, and the disclosure of those high payouts has inflamed the public and some politicians. The new reform law will also make the California Public Employees Retirement System more transparent on how it administers pensions.
Crane says that despite the reform bill, benefits will keep rising, and will cost California $6.5 billion this year - more than the state is spending on higher education.
In San Francisco - a union town - the public defender, regarded as a liberal Democrat, has put a measure on the ballot that would require city employees to pay more for their health and pension benefits. He says the city treasury is being drained by those costs, which translates to less money for health and social services. The measure is being fought with vigor by unions, wanting to protect their benefits.
Cities across the country are concerned that pension costs will cause them to default on payments to retirees, and that would force the already-stressed states to pick up the tabs. About a dozen cities in California have pension reduction measures on the ballot - more than ever before. Crane says there's no bigger financial issue affecting state and local governments -"nothing comes close."
With voters apparently angry at government and public spending, the pension issue fits in well with the political mood. But even if it fades from view, the financial problems it augurs won't go away. And no one seems to know how to deal with them.