Promises, Promises: The Public Pension Pinch

BY Paul Solman  January 17, 2011 at 12:52 PM EDT

Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here’s Monday’s query:

Name: Sharon McDonnell

Question: I am so very sorry we do not have a larger serious discussion about the role of government and what our priority needs are for spending. In fact I am completely baffled how people that want to rescind Social Security and some health care coverage believe that someone at 80 years of age is supposed to not end up on the street. It would help me enormously to hear what a Republican plan is for persons that cannot afford medical care, nursing homes or cost of living. It seems that making sure these are covered for the “deserving” former worker is far down the list. A congressman the other day was appalled at the price of pensions for “prison guards” — do they believe pensions are bad or just that somehow prison guards shouldn’t get them? But, I guess my real hope is to understand how the woes and belt-tightening in U.K. and France and others are essentially a part of the larger global recession started here in the U.S. or if it was inevitable. And, won’t we end up having to make many of the same choices? Thank you.

Making Sense

Paul Solman: I answered the first part of this question in a previous post. Rather than try readers’ patience, I thought I’d save the problem of “deserving former workers” for today.

What about “prison guards?” you ask, Ms. McDonnell. Well, there is certainly a revolt of sorts against public employees and especially their pensions — pensions promised by government officials who figured they’d be long gone by the time the obligations came due. Look at California. Taxpayers, public pensioners and creditors (bondholders) remain on a collision course. In the end, it will cost someone (everyone?) to fix the problem.

What happens to a government that simply can’t deliver on its pension promises? See the recent story of Prichard, Ala., in the New York Times. Government pension overreach is a story we’ve long meant to tell; it’s getting more and more attention these days as the situation becomes increasingly dire.

Perhaps an economic upturn will start replenishing coffers, forestalling a pension crisis yet again. But if not, how are Prichard, Ala., or prison guard pensions any different than those of bankrupt Bethlehem Steel, whose workers we interviewed back in 2003? Steelworker Melvin Schmeier says he and his co-workers were assured that “‘the sky would have to fall before you would lose a big part of your pension.’ Well, evidently, the sky did fall, because we’re going to lose it.”

The global recession has hastened the day of reckoning for many, no doubt. But the public pension problem seems more closely connected to the cause of the recession than its consequences: the tendency, in most VDCs*, to promise anything — on the assumption of dazzling future prosperity and thus wealth growth substantial enough to make good, some day, a day which, because of continued faith in continued growth, would never have to come.

Thanks for the email, Ms. McDonnell. If the annual economics convention in Denver was a leading indicator, pension overreach and retrenchment is as significant an issue as any in the developed world these days and especially here in America. Look for a story of ours on the issue very soon.

*Very Developed Countries.

Photo by Edouard Guihaire/AFP/Getty Images.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._