The central portion of While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis
The result was that public employees were generally paid less than private sector workers, but could not be fired for incompetence or unproductivity and had better benefits, including small pensions that typically started at age 65 or 70 or upon becoming totally disabled.
All of this was changed in 1958 when an aide to New York Mayor Robert F. Wagner, Jr. suggested that city workers could be a large enough voting bloc to ensure his reelection. Wager signed an executive order authorizing city workers, notably those of the transit system, to unionize and bargain collectively. As the percentage of Americans working for the government grew, other politicians began to see support for public employee unions as a way to get votes. State politicians around the country allowed public employees to unionize shortly after Wagner’s executive order. President John F. Kennedy allowed federal government workers to unionize starting in 1962.
According to the author of While America Aged, public employee unions should be able to win much higher wages and benefits than private company unions. The UAW could shut down GM or Ford with a strike, but they couldn’t vote the GM and Ford CEOs out of office. Once a sufficiently high percentage of voters are unionized public employees, there is essentially no limit to the obligations imposed on the state. Because it would cause too much backlash from non-union non-government employed voters, most of the money extracted from taxpayers will be taken in the form of long-term health care and pension promises. A voter working at Walmart gets upset hearing that a bus driver is earning $130,000 per year. If instead the bus driver is paid $70,000 per year and able to retire at age 41 (MBTA here in Boston), it is tougher for a voter to figure out how much is being spent. Pushing most of the spending out 10-50 years gives the politicians who agreed to the obligations at least 10 years in which to move to the next level of government before the true cost of the agreement becomes apparent.
Reading this book makes it clear that recovery from the Crash of 2008 is speculative. In the previous severe economic downturns, e.g., the 1980 Jimmy Carter malaise, U.S. workers did not face effective competition from workers in India and China. Government was a smaller percentage of GDP and public employees were not paid so much more than private sector workers. Most importantly, the pension obligations of governments were tiny compared to today because they’d only had a decade or two to develop. As all of the wealth and value that was in GM eventually had to be transferred to retirees (and then another $100 billion of taxpayer money, when the value of GM’s business was not sufficient), it may be the case that most of society’s wealth has to be transferred to the 41-year-old retired bus drivers of the MBTA here in Massachusetts, the 50-year-old retired fire department workers of California, et al.
Private companies have gotten out of this trap by wiping out their shareholders and shedding their obligations in bankruptcy. For governments, however, there is essentially only one way out of this trap: grow the tax base dramatically. That was essentially what the GM management and politicians who agreed to the pensions had relied on. The company or economy would expand forever at whatever rate it had in the best decade that anyone could remember. According to classical economics, however, wage growth is impossible without capital investment. If a company spends $1 billion to equip its factories with better machines, an hour of labor will have more value and the company will bid up wages until the factory is fully staffed. In our prostrate economic condition, however, business isn’t investing. So the tax base isn’t going to grow via wage increases. The alternative is to grow the population size until the U.S. is as densely populated as mainland China.
In terms of paying for union pensions, pushing back the age of retirement is a worthy goal, but another strategy used in the past to some success (but not yet exhausted!) is raising the percentage of pension contributions by new union members. Unions will usually eat their young, so if you negotiate with a union along the lines of, “we’ll give you X and Y in the next contract as long as you agree that your NEW union members will pay a higher percentage of their salaries toward their eventual pension benefit,” almost any union will go for it without batting an eye. In this manner, over the course of a few contracts, you could probably make new union members pay 55 or 60 percent of their salaries toward their pension. This will help keep the union pension plans solvent without violence, since unions will usually trip over themselves voting for anything that helps current members. It might also, over time, encourage people (at least the ones with any math skills) who otherwise might seek out a union job to pursue employment elsewhere.
On the other hand, aside from organizing voters, paying people to do (at least to some degree) nothing, should be balanced against whatever would need to be done to control an angry, hungry, unemployed mob. Some people seem to think that making it difficult on less-productive members of society will necessarily result in these people bettering themselves and contributing more to society, but they could also just turn to lives of crime requiring society to incarcerate them. So here’s another question… is it more expensive to give someone a cushy union job or to incarcerate them for life? Maybe union pensions are actually bankrupting our country slower than a larger prison system would, or maybe the whole thing is just a well-thought-out system to buy us time until we can find a better solution for either making our citizens more productive or inventing another internet.
We could also just forget about reforming union contracts, and just do what we apparently do better than any other country: http://tinyurl.com/ls2qj7 If you make enough money, all your problems magically melt away.
Governments tend to do today what is in their best political interest, and defer to tomorrow the consequences.
When politicians speak of a plan being “fully funded”, they do not add “in theory”. Once a plan is in place, it tends to continue, unexamined, until disaster looms large.
Unfortunately, America is politically driven by True Believers and opportunists, whose fundamental tenets are either flawed or ignorant of successful alternatives.
For example, the Conservative belief in an unfettered free market, without regulation or oversight, as being the most productive form of commerce, gives us systems that may be legislated, but which are not properly overseen.
This lack of oversight gave us the Madoff disaster, which went uninvestigated despite very erudite whistle-blowing over a period of a decade, and laws that allowed for effective intervention, in theory.
This same belief in unfettered free markets brewed the disasters that befell the financial markets in 2008 by ignoring the way in which securities were rated, and the gaming of the derivatives market that took place by insiders who could not believe the opportunity this fraud was creating.
Public pension debts are yet one more of the disasters waiting to happen. Add this to the commercial real estate market failure that is now underway in the US, the growing unease with credit card debt, which has to come to a head sometime soon, the continuing expense of military action, the appalling growth in medical costs which continue to spiral out of control, and the fact that all the ‘fixes’ are financed on yet another layer of debt.
As America became wealthier in the 20th century, it printed more money, and spent it around the world. It then borrowed that money back so it could spend some more.
The property boom post-2001 was the ultimate boondoggle. This put increasing quantities of borrowed money directly in the hands of consumers, based on the Moody’s rating of junk mortgages as AAA investments, which allowed them to be insured by insurers who did not understand the changed game.
Now,the Federal Government is trying to put money into circulation to prevent property prices going into free fall, because further falls in property values will put the banks at risk again.
But the problem is, every State, County, and City Government is running in deficit as well, and making up their deficits by arcane borrowing efforts.
By 2010, these machinations will be increasingly unacceptable to financial institutions outside the US, and the dollar, as a reliable medium of exchange, and store of wealth, will become a less attractive currency.
America’s problem is not that it is the richest country in the world. The problem was, whatever it’s income, it managed to spend substantially more, because it had the credibility to be able to borrow to bridge the gap.
This same thinking applied in Government spending on Government employees, at State, Federal, County, and City level. Money has been effectively borrowed today by implementing plans that offer rich,early retirement and future benefits as part of the cost of today’s service.
The fact that this all passed without comment is that this is the way all America has grown. Make as much money as possible, but borrow to the limit as well.
This mentality has been compounded by the benefits to borrowing. Not only does it allow more consumption, but in many cases the cost of borrowing (interest and service costs) are tax deductible.
So now, the Government is going to have to pay the piper. With tax money, unfortunately.
The worst part is that the US will never examine systems that have been implemented in the rest of the world to find out what works. Whether building a rail system (BART, in the San Francisco Bay Area, remains a slow, rattly, inefficient, inconvenient, and incredibly noisy monument to lousy public transport systems) to all kinds of Government-run corporations that have to manage their business for the long term, that have sister operations overseas that are much more effectively managed, American implementation is done with eyes wide shut.
And when the wheels fall of, the implementers say, “Well, who knew?”.
They didn’t. Because they weren’t even looking.
Oh, and when Governments can no longer grow their tax base to meet their obligations, they declare bankruptcy.
This is the real scenario that the US now faces at every level: Federal, State, County, and City.
The smaller will be sacrificed first, as the imperiled system totters.
Watch for cities and counties to declare bankruptcy first. The States will take over the taxes from bankrupt entities to help stave off their own slide, and the Federal Government will preempt what it needs from the disbursements that would normally go back to the States.
If these dominoes do topple, the level of services will decline precipitously as this takes hold. We will still be living in the mansion, but we won’t be able to afford the gardeners or the utilities.
We have lived to long with a government that believes what is good for the public employee is good for the people. A government that allows private sector jobs to go overseas for the express purpose of obtaining higher profits for public employee pension funds, at the cost of private sector jobs in the US. A government that thrives by insuring its citizens live in such fear and uncertainty that they will take orders and hope for the best. A government that has created a system of rewards that constitute preferential treatment and as a result a class system. A class system that provides a better standard of living for those in its employ. A system of the state that that enslaves all to its group think mentality. A system that corrupts the very fabric of a government formed by the people, for all its people.
No longer will I be silent as our country is plunged further into fear and despair. No longer will I sit by as trillions more are redirected to employees of the state and the expansion of their enterprises. To accomplish this, the corrosive policy’s and practices of public employee unions and their pension funds must be communicated clearly to all citizens. Your efforts to do this honestly without malice is greatly appreciated. Together our voices will be heard, our message will shed light on this our governments darkest practice and greatest threat to our nations future. To paraphrase Dylan Thomas, “We will not go gentle into that good night, Old age should burn and rave at close of day; Rage, rage against the dying of the light.”
You might want to cite this article by our local newspaper, The Oregonian, about the havoc our Public Employee Retirement System (PERS) might unleash over the next few years.
The cause? A promise to always return 8%.
http://www.oregonlive.com/business/index.ssf/2009/10/looking_down_the_barrel_of_per.html