Tuesday, August 19, 2008

Why do the bulk of state and local employees need special pension plans?


The South Carolina Supreme Court recently ruled that municipal governments could not form a fund to invest their retirement monies in the stock market. The legal decision was sound, as the South Carolina Constitution bans such. The people of South Carolina will ultimately decide the issue when a constitutional amendment allowing such investment appears on the fall ballot.

The merits of the argument for or against such investments will be reserved for another time. The fact is the vast majority of the costs involved with such benefits needs to be addressed in a radical way.

It is far past time for those not involved in public safety jobs to be removed from a special pension system. At the time that the pensions and other special benefits were created for state and local government employees, such jobs were not competitive with the private sector in regards to salary. In order to draw talent to government jobs, such benefits were offered.

The landscape has changed. With more high paying private sector jobs in areas such as manufacturing being replaced by relatively lower paying service based jobs, government jobs for the vast majority of government positions are competitive in salary. Further, it is harder to be fired from a government job for whatever reason.

The various government employee unions, or associations as we in South Carolina seem to call them, will scream to the high heavens. However, they should note how the UAW’s pension demands have almost put American automakers out of business. Detroit struggles to compete in today’s global economy because it is saddled with pension commitments. If the costs of state and local government pensions continue to grow, that cost will be passed along to the taxpayers, thus they will spend less money (less sales tax revenue) or choose not to invest in South Carolina, and a vicious cycle is created.

In the short term, with or without private investment, the numbers will be staggering as South Carolina governments pay a growing number of retirees that matches those still working for governments and contributing. Indeed, some studies show that South Carolina governments will reach a point in the next few years in which they will be paying more people who are no longer working than they do people who are working.

How do we begin to solve the problem? One idea, with marginal effect is allowing the local governments to invest in the private stock market. Another idea, which history tells us will fail, is to substantially raise taxes to pay for the increased costs of benefits.

Then, there is the radical solution. First, governments should keep their word and find a way to honor commitments to those who about to retire or those in some sort of relatively small window to retirement. For the rest of those government workers who are not in public safety, which is aged limited in its physical demands, the current retirement system should no longer be offered. Those employees instead should participate in the Social Security system and be offered a contributions based plan, such as a 401(k).

Let that sink in. That solution is not attacking the value of school teachers, social workers, government clerks and the like. It is recognition of the changed landscape and the competitive world we live in. Indeed, how can government employees, who have the same physical demands upon them, if not less, than those who say, work at the local plant or the local café, justify being granted special benefits over their fellow South Carolinians?

Here is an example for consideration. If you are a secretary for a local business, you have to work to federal retirement age, and unless some other agreement is reached with your employer, when you retire, your pension will be from your social security, your extra benefits will be from the 401(k) you contributed to, and your healthcare will be covered by Medicare insurance. Now, if you are secretary in some state or local government office, you can retire years under the federal retirement age, you get a benefits based retirement, and your healthcare costs are assisted before Medicare kicks in. In that example, you have two people performing similar jobs, with similar physical and safety demands, getting two very different sets of benefits. Add to that the secretary from the private sector will have to help pay for the increase in costs of the secretary in the public sector’s benefits.

In sum, the current status of state and local government retirement benefits for the vast majority of such employees is not economically or morally right. Perhaps such largess could be afforded before, but the landscape has changed and the policy needs to change with it.

5 comments:

  1. You try teaching the messed up children and dealing with their messed up parents and see if you would not want to retire "early" as you put it.

    You are so ignorant of what teachers really deal with. We deserve our pensions. Your children make us earn it.

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  2. Then don't teach if you don't like the job.

    Go drive a cab or work in a convenience store. There's no dress code, you don't have to speak good English and you have a much lower chance of getting shot than a public school teacher.

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  3. The previous post illustrates the problem perfectly. We have bred a generation that feels government handouts are entitled to them and do not care if they bankrupt the state as long as their check continues to arrive. This problem will right itself eventually, but only after things get much, much worse.

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  4. When Gov. Sanford asked the legislature not to give the 2% COLA to retirees because of its impact on the budget, the "brain trust" in Columbia over ruled him because it is an election year and most government retirees vote.
    I do receive a check and I contributed 6% of my check every payday for all the years I worked. It is not a give away as this article seems to suggest. And as for medical insurance help, my city did not choose to do that for me.

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  5. Anon 2, I see your point. You paid into a system and your deal should be honored.

    However, the hard cold truth is SC governments can no longer afford in this competitive world to make similar deals from here on out.

    I do not fault you or think less of you or anyone else who made similar bargains with government employers. I simply state that it is not affordable anymore and frankly, it is not how the rest of the world works.

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