The Crisis in Pension Benefits
By Joe Cobb
Social Security is not the only "defined benefit" pension plan in trouble. Indeed, it seems as if they are all going bankrupt. United Airlines just dumped $6.6 billion in unfunded pension liabilities into the government's Pension Benefit Guarantee program, which currently has a $23 billion deficit. The old steel companies dumped their pension plans there a few years ago. General Motors is probably not far behind.
Some congressional number crunchers figure the Pension Benefit Guarantee Corporation faces a shortfall of more than $120 billion over the next decade. The Government Accountability Office estimates a $450 billion gap between the defined-benefit retirement pensions private employers have promised workers and the amount set aside to deliver them.
A "defined benefit" pension plan is a promise an employer has made to workers, based on a formula: your salary before retirement multiplied by the number of years you have worked. Every formula has little variances, but they are all essentially a promise made to workers before retirement. Sometimes the promises cannot be kept.
A survey released in early May by Wilshire Research determined that 81 percent of corporate pension plans offered by S&P; 500 companies are "underfunded," without enough financial reserves to assure the promises can be kept. These are private promises, often made by employers in old unionized companies. The employers saw the promises as a cheaper alternative than wage increases, although in recent years it has become clear these promises are "company killers," as in the case of United Airlines and the steel companies.
Is there any moral argument to justify this mess being dumped on the taxpayers? There are 44 million workers, almost a third, in this predicament. Some might say the workers who relied all their lives on the promises of a retirement pension are morally entitled to get their pensions. This is nonsense.
If your neighbor promised his daughter a new car when she graduated from college but didn't have the money to buy it when the young lady came home with a B.A., would everybody else in the neighborhood have a moral obligation to contribute to buy the car?
The pensions promised by old unionized corporations to their workers are private promises, not obligations on the taxpayers. The taxpayers ought not to pay for them.
Every government agency also has an underfunded pension plan. San Diego is facing bankruptcy because of its serious pension problem, and the State of California is nearly there. Around the United States, every government is facing a similar problem with pensions that are too generous to pay for. Government pensions, however, are obligations on the taxpayers like any other form of government debt. Yet this form of government debt was never approved by a vote of the taxpayers.
Bonds must be approved by voters, but pension obligations are negotiated by government worker unions with politicians who were selected by those same unions through campaign contributions and re-election assistance. Government pension promises are much more generous than private sector pension formulas because the politicians do not represent the taxpayers when signing in favor of future payments, which won't fall due until after their terms of office have expired.
In San Diego, a city facing bankruptcy as the result of underfunding, pension board members are facing criminal indictments for voting benefits that would have benefited themselves, a clear conflict of interest.
Taxpayers should start to look more favorably on government bankruptcy actions. There is no way to pay these pension benefits without dramatic tax increases, and we have no moral obligation to pay them, since the taxpayers had no vote on the promises to pay such generous pensions.
Government employees already receive wages that are higher than equivalent jobs in the private sector. In 2004 the average salary for a government worker was $49,275 compared with $34,461 for everyone else, according to the Employee Benefit Research Institute (EBRI). Even white-collar workers are better off in government jobs. According to the US Department of Labor., state and local government managers and professional staff earned $42.87 an hour last year, while their private-sector counterparts earned $41.52. One big reason: government workers get $2.62 an hour in retirement benefits; everyone else gets $1.63, according to the US Bureau of Labor Statistics.
Government employees should not have generous pension plans, since they can afford to save for their own retirement out of excessively high wages. And don't get me started on the gold-plated health care benefits government workers receive . . .
Joe Cobb was chief economist for the United States Senate, prior to holding the prestigious John M. Olin Senior Fellowship at the Heritage Foundation (1993-96).
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