Let's You And Him Fight

by Jacob Davies

Smells like ... snow job:

The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide.

The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.

I like when every quote and example in a story is calculated to emphasize the supposed conflict between private- and public-sector workers:

Private sector retirees who want their own monthly $2,883 check for life, complete with inflation adjustments
...
who wants to pay to top off someone else’s pile of money via increased income taxes or a radical decline in state services?
...
If you find the argument of Colorado’s retirees wanting, let your local legislator know that you don’t want to be responsible for every last dollar necessary to cover pension guarantees gone horribly awry.
...
if you’re a government retiree or getting close to the end of your career? Consider what it means to be a citizen in a community. And what it means to be civil instead of litigious.

I want numbers. How many public sector workers are receiving $3,000 a month pensions? How unsustainable are the various plans? Are the most underfunded plans the ones with the largest promises? How common are 3.5% annual increases regardless of inflation? I guess that stuff is boring. Better to tell us about the impending class war.

I'm irritated by the presentation that demonizes the workers not because I think they're entirely blameless, but because absolutely everyone involved in setting up this disaster deserves scorn - workers, unions, state employers, legislators, and the public who let it happen. Workers and unions accepted unrealistic promises of future payments - which worked out okay for the older ones among them who retired earlier, before the plans got so top-heavy - and let the state get away with underfunding them. State employers and legislators made their budget numbers by trading lower salaries (their problem) for higher pensions (somebody else's problem). And the public let it all slide because hey, low taxes!

Speaking as a member of the generation designated to pay for all of this, I'm not impressed.

Comments

[Brian]

Sure, there's a limit to hands on firefighting. I just was getting a whiff of "we can't even think of cutting firemen's pensions" because they're particularly heroic from some of the commentary above, and it rankled.

Pensions deserve to be treated as significant debts from the moment they're agreed to; if the city agreed to a fixed benefit, it should be responsible for living up to its end of the bargain, up to and including raising taxes or declaring bankruptcy so that all the debtors can be satisfied as best as possible with the city's assets. There's a real moral hazard in allowing cities/states to go up to the edge and simply argue that they don't want to/didnt' forecast properly for the pensions, and so they shouldn't have to pay.

But all the job categories should be dealt with fairly as part of that process. Firefighters, clerks, garbage men.

[sekaijin]

To address Brian's thoughts: as I mentioned above, I am willing to take into consideration the pressures of market forces on pension funds. The problem is, people who worship the market and preach how those pressures could revitalize pensions through, say, privatization of the funding instruments overlook the fact that those pressures could just as soon destroy the plans outright.

An efficient market would be one in a steady state. What we have instead is a dysfunctional one. I couldn't agree more that the market, when directed toward public utility, could probably do a lot more than non-market sources of funding for things like pension funds. But that would require a more evenly-distributed tax base, regulation of the market with legislation against abuses by any leading decision-making actors, etc. - all of which we don't have a government that's willing to do and a population that's willing to protest for.

I also couldn't agree more that people should be able to retire with dignity. But again, to make it happen requires what I've just said right above, and we're not willing to do it. So you're going to get quaint how-much-is-too-much arguments instead of the real ones that practically grapple with how it could be made possible. There's no social contract, even amongst ourselves, anymore, to do it.

The actors above are in power, economically and sometimes politically. It's not in their interest to fix things. If anything, their interests lie toward the Gordon Gekko mode from the Wall Street movie: wreck it because it's wreckable, whether it's a pension fund, a company, or an entire industry. Creative destruction is fun when someone else has to pay for it and pick up the pieces.

[Sebastian]

"An efficient market would be one in a steady state."

You're assuming that things like technology, demographics, and natural resource availability are static. They aren't, and one of the biggest virtues of markets is that they adapt to those changes faster and more regularly than bureaucratic institutions. (And to head off the objection that private companies often are bureaucratic, that is true, but when they are market participants they still typically have to deal with the reality of such changes much faster than governments--who can and do paper over enormous mistakes by taxing everyone more rather than correcting or even noticing the error).

"The problem is, people who worship the market and preach how those pressures could revitalize pensions through, say, privatization of the funding instruments overlook the fact that those pressures could just as soon destroy the plans outright."

I don't have much faith that privatizing would have helped very much here. The main problem was over-promising combined with under-funding. I don't think markets could have overcome either problem in the magnitude that was actually seen by the governments in question, and almost certainly not both problems combined.

Brian:

Sebastian,

you seem to be committing a very basic logical fallacy. There's absolutely no reason it's unsustainable to pay someone 90% of their peak salary for 40 years. In the steady state: someone works for the city for 40 years, then gets 90% of their salary for 40 years. You're talking about roughly doubling salary costs. That's not inherently unsustainable; it depends what their actual salary was, how responsible the city is about funding these things, taxation revenue, etc

I think you're confusing my argument. I'm not arguing that it is against the laws of physics to have pensions where you get paid at 90% of your salary for 20-30 years where you don't work. I'm saying that it is unsustainable. As you note, it would involve roughly doubling current payroll costs (and that is without even counting the medical costs which are certainly higher in the post-retirement years than they are in the working years). Payroll is typically the largest or one of the largest expenditures for local governments. Doubling that cost would be an enormous change, not easily talked around just because it is technically non-impossible. Now it isn't logically impossible that we could make up that money by say abolishing police departments because we could theoretically all get along and never need the police. But in practical reality it isn't a possibility. Nor do I think it would be wise in any case. We typically pay people top salaries toward the end of their careers because that is when they have the most experience, training, and understanding of the job--i.e. they are most valuable. Paying them near their most valuable rate for 25/26 years where they aren't using those skills for the entity paying them, and only getting them at the peak level of experience and training for four or five doesn't really make much sense. It isn't that it is a technical impossibility to set things up like that. But I don't see why you would want to.

Now that introduces the question of why cities did. I think the answer is that they were just putting off the day of reckoning by making promises rather than paying now.

[Nate]

Because thirty years of anti-tax rhetoric have made our politicians completely unable to handle money in any sane way and made a large group of voters whose knee-jerk reaction to any mention of taxes is to lash out and scream socialism.

This has been another edition of simple answers.

[russell]

I think the answer is that they were just putting off the day of reckoning by making promises rather than paying now.

Sounds about right to me.

As an aside - IMO the world would be a better place if folks stopped talking about "the market" like it was some kind of perfect machine.

The closest analogy I can think of to the market would be something like weather.

Yes, it will seek equilibrium through it's own internal dynamics, but sometimes it does so by spinning off tornadoes and hurricanes.

It's not good, bad, or indifferent, it just is what it is. But if you're intelligent, you take note of, and plan for, bad weather.

[sekaijin]

Seb, you've made a reasoned argument above but your assertion here:

(...) one of the biggest virtues of markets is that they adapt to those changes faster and more regularly than bureaucratic institutions. (And to head off the objection that private companies often are bureaucratic, that is true, but when they are market participants they still typically have to deal with the reality of such changes much faster than governments--who can and do paper over enormous mistakes by taxing everyone more rather than correcting or even noticing the error).

I have to address this, and it's a huge swatch here I'm pulling to do so.

You seem to assume that markets always respond to changes affirmatively for a public good, and especially if public utility is at stake. There might have been a time when they did that - but they're not doing that anymore. When you rest public utility on private actors anymore, you're going to get conditions that entirely favor the private actors (see health care insurance).

But your "correcting or noticing the error" line is a baffling one. On a scale of this magnitude, how do we "notice the error"? Re-do the books? Maybe cook them? Certainly no public official, at least not now, is going to have the guts to stand up and say "jeez, sorry folks, but we just, you know, kinda didn't have enough in the kitty to fund your pensions, so... sorry, but, uh, you're on your own now." And no hedge-fund guru or money market bloodhound is going to rush in with a solution to the problem.

When we rest things like pension schemes on a pinched tax nexus that pushes the burden onto the people less likely to truly afford it, knowing fully what the result will be, the promises will be broken because people of income levels likely to depend on these pensions can't keep giving and giving to sustain them.

In some ways, we're not so far apart in our thinking. I agree that privatization of these schemes would have been a terrible idea because it's a handy excuse to shirk public authority. But your "I don't think markets could have overcome either problem in the magnitude that was actually seen by the governments in question, and almost certainly not both problems combined" argument doesn't quite wash because ideally responding to change as quickly as you believe they do depends on being able to see certain things up ahead, better than governments; response without foresight is just reaction. So, do markets just react to things?

If so, privatization of public functions is in toto is a disasterous idea - not just for the pragmatic reasons you do admit, but because we're resting these things on an mechanism that is never more than short-sighted. But if the market is as efficient as I'm reading that you believe, certainly the best of what markets can do could've been applied sooner, in some way, to boost the sustainability of these funds if a fairer tax base was politically unpalatable. But they're not interested.

So, what do we have left? I would rather that markets be left to do what they do and keep them out of public utility because as they're conceived in America, they do a crappy job at it. But we live in a socio-political reality in thrall to the market. And what we're facing is both a world where taxes will continue to be unfairly levied and a market that does nothing to think outside itself and add a public-utility string to its bow.

[Nate]

"The closest analogy I can think of to the market would be something like weather."

I'm gonna have to disagree with this, much as I normally agree with Russel. "The Market" is not a natural force, like the weather. "The Market" is a mechanism created by humans, to help us create and obtain the things we need and want. Markets are created to fulfill human needs. When they're not, something is wrong. But that something is not some law of nature, it's a human construct. A complicated and gigantic one, yes, and maybe one we have let loose of its bonds to the point where we can't control it. But markets are made for people, people are not made for markets. If markets aren't working right, then it's time to change their rules so they do. (Maybe by making rules so markets are more transparent and other things to make them match economist's assumptions about them)

[Sebastian]

"But your "I don't think markets could have overcome either problem in the magnitude that was actually seen by the governments in question, and almost certainly not both problems combined" argument doesn't quite wash because ideally responding to change as quickly as you believe they do depends on being able to see certain things up ahead, better than governments; response without foresight is just reaction. So, do markets just react to things?"

Markets aren't magic. If you make unsustainable promises and additionally dramatically underfund them, yet still convince people that everything is ok, putting a market mechanism in there doesn't help you.

Market mechanisms make it harder to hide the fact that your promises are unsustainable. Market mechanisms make it more obvious that you're underfunding. So in some sense, the problem might not be so bad, because the day of reckoning might have been sooner, and there might have been fewer decades of people to whom unsustainable promises were made. But markets aren't efficient enough (at least not at the moment) to have made up for the magnitude of the promises.

And I'm not sure what you mean by "do markets just react to things?". On some level all markets are is reaction. But it is reaction to the best planning the actors can foresee at the time. The reason why markets tend to do better than governments in the reaction department is that it can't sustain the lies and self deceptions as long as governments can. (Which to be super clear is not the same as saying that they can't sustain lies and self-deceptions for a time).

"ut if the market is as efficient as I'm reading that you believe, certainly the best of what markets can do could've been applied sooner, in some way, to boost the sustainability of these funds if a fairer tax base was politically unpalatable. But they're not interested."

Who is the "they're not interested" in this sentence? The actors in the market? The actors in the government? Who?

I don't think you're understanding the magnitude of what you're asking. You're asking for the markets to be efficient enough to effectively double the payroll of the cities at no additional real cost. The problem with that is, that whenever the market is that efficient, people's lifestyles improve as well. I have no doubt that the market has improved life in the US enough that anyone who wanted to work until they were 50 and then have the standard of living of the average American in 1950, could do so. But the average American in 1950 didn't have the health care they can have now, had to work much harder around the house, didn't get to fly to vacations, didn't own a house, didn't have any of a number of leisure items now available, didn't have air conditioning.

When the market makes improvements, people's expectations rise to meet them.

Which is great. But the efficiencies in the market are going there. So you don't usually get to get them there AND live at the new higher standard of living for 1/3 of your life without working. The market is good, but so far it isn't that good.

But neither is the government.