Pensions in the political economist world
Center for Business Public Policy’s Jeffrey Brown wrote a simple economic critique of David Cay Johnston’s (Tax.com) piece on pensions.
David Cay Johnston dropped by with some lengthy comments and replies. Well worth reading the entire thing, especially the comments.
Then by David Cay’s logic, any future pension shortfalls (or health care), gaps or liabilities also belong to the workers and they should be responsible for the shortfall. Now, WI’s pensions are in good shape, so their Governor may be using the savings to plug other budget holes. But, many other state pensions are not in good shape, such as Maryland, which has some pretty big gaps, and our Democratic Governor has asked state employees to conribute more to close that (their pension) gap.
mcwop
apologies… i haven’t read david cay’s piece yet… but
the workers should be “responsible” for pension shortfalls or health care unless they have a contract that the state agreed to be responsible. there are reasons they… and the state… would do this. the state is generally in a better position to weather economic hard times than individuals. by offering to take the responsibility under the contract the state would be in a position to offer lower “up front” compensation.
the only alternative to that that makes sense for workers would be to be members of a union large enough to manage the same risks.
my understanding is that the unions are under assault, along with the pension plans and health “benefits.”
mcwop
okay, now i have read david cat… yes. he is saying what i said.
McWop….Jeffrey used WI in passing as an example and no other. David responded usinmg WI as the offered example. IL and OR also occurred to me, but the rules are so different between states that I caution a generalization based on your own particular state unless specifics are offered.
MA has been upping contribution %’s from new members over the last several decades as a way to cope in what has become a tiered system in retrospect…
coberly….hmmm, sector wide agreements? Big pension numbers.
Depends on whether the contract was made knwoing teh promise is unsustainable or not. And many deals are made knowing full well that under any circumstances there will be a gap.
Unions “bribe” officials with campaign money to make sweetheart deals that they fully well know have these large unsustaianble gaps, knowing the taxpayers will end up taking paycuts in the form of higher taxes so the union will get their unsustainable deal. I think public employee unions should have all the wonderful collective bargaining rights in the world, but be barred from making any campaign contributions to their employer. I find the latter consistent with the most basic of ethical standards.
Unions may be under assault, but in some cases it is with pretty good reason. I can make the same case that many taxpayers are under assault at the local level too, by their government and unions abusing their basic fiduciary responsibilities. Taxpayer’s “union” rights take place at the voting booth, and many taxpayers are telling unions that they do not want to be taken advantage of, and telling politicians they had beter balance union rights with taxpayer rights rather than just giving the union whatever they want.
It does get very complicated by state, to the point where contracts specify the return used to calculate benefits. That return can sometimes be totally ridiculous.
Maryland faces about a $33 billion pension shortfall. WI actually has no pension shortfall, and I believe has mechanisms built in to prevent it.
Here is an article today on CALPERS and the rate of return assumption (not and example one built into contract):
http://online.wsj.com/article/SB10001424052748703899704576204980794262352.html
Pensions are great when they work and have favorable demographics, but when they fail, they really can be an albatross. My preference is toward cash balance pensions.
Good article with backgorund on Maryland and the games government played to get us in the mess. And this is a great example why many taxpayers are angry.
http://washingtonexaminer.com/education/2010/11/md-facing-33-billion-pension-gap-analysts-say
McWop
no one gives unions whatever they want. and the “taxpayers” doing the complaining are the same high end taxpayers that don’t pay taxes and want to cut your wages to subsistence or less.
and of course those taxpayers like you who are easily fooled.
Mc wop
taxpayers are angry because very good liars are paid a lot of money to make them angry.
the “mess” was caused by the games bankers play with all the money the “taxpayers” have withheld from paying for the government their lobbyists asked for.
No, contracts merely require understandingof the terms and exchange of consideration. You do not break contracts because they get hard to perform.
@mcwop, it is usually a good idea to atcually read what you are commenting on before commenting.
I address the issues of sound funding in my column at tax.com. In my back-and-forth with Prof. Brown and Andrew Biggs, who read first and then commented and were therefore thoughtful, I also addressed the offsetting gain to taxpayers when management (the state) fails to properly add cash each year to cover newly accrued pension benefits..
How about actually reading what I wrote, paying close attention to my carefully made and subtle arguments, and then posting?
My original column is at
http://tax.com/taxcom/taxblog.nsf/Permalink/UBEN-8EDJYS?OpenDocument
“I won’t say much to your point about wealth destruction, other than to say that the biggest source of wealth destruction in the US has been 30 years of fiscal policy that has led to a crushing national debt. The defiicits have crowded out capital formation. I agree that some govt spending is investment (e.g., education, research, etc). But much is “consumption” (I put in quotes, because it includes “consuming” things like military equipment.) I am not cating partisan blame – both parties have been totally irresponsible, with a few exceptions on both sides.”
I find it hard to go back and make sense of what Jeffrey Brown is saying after seeing him make this point. Faith in “crowded out capital formation” seems like something that makes the rest not worth paying much attention to.
@ david,
don’t let the side conversation take away from the main points: a) all compensation is earned, b) responsibility to cover accrued retirement benefits each year, c) sound investment of the money, d) adjusting total compensation to economic conditions, e) not confusing accounting with economic substance.
Prof. Brown has raised good points and going back and forth is a good way to sort out the issues.
What to not waste time on are fact-free posts and those that make sweeping generalizations, especially when they ignore carefully reasoned and fact-based points. Prof. Brown does NOT NOT NOT fall into that category.
Thanks for commenting David, and the advice.
Lets also go after information coberly.
david cay
in fairness, unless i missed something,it was I who commented before reading your column. i did read mc wops.. which was what i was commenting on. then i went and read yours, which i agreed with.
David Cay
RDan
This is not a learned journal. Standards of “fact” and citations are not going to be what you might wish. Moreover, when a professor cites “theory”, i don’t regard that as “fact” however well documented the theory might be.
i don’t have much trouble accepting as “fact” a blog comment that finds “crowding out” to be ridiculous in a zero interest environment. even if a good case could not be made that some government investment is “worth more” than some private investment. that, after all, is what we have a government for, even if you think the only worthwhile government investment is new submarines for the war on terror.
as for my own fact free comment.. i don’t have time to find citations for what is common knowledge or at least generally accepted opinion among, say, most of the regular posters at Angry Bear… that “the mess” has been caused by irresponsible bankers and irresponsible tax cuts.
apparently you don’t realize how many “facts” turn out to be “opinions” when examined closely.
which we don’t do here.
I did read it before commenting, but I did not read your back and forth comments covering shortfall – though I will. But I also feel you are ignoring some of my other points. The electorate does not care about the economic labor principles being right when their perception is that it is their money first and state workers second – and that is not necessarily incorrect. In order for your points to be understood by the general electorate, you need to position that message in a way that it resonates around these voter perceptions – and that was the main point I am getting at.
Miami is a perfect example of this perception. Voters were/are upset that despite high unemployment and hard times there, the government raised property taxes, gave many in governmnet raises (especially executives earning 6 figures), and the Miami Dade Mayor with the help of taxpayers bought a $75,000 BMW. Well he lost his job, and he was a Republican if anyone was wondering.
Nevertheless
I agree with David CAy Johnston
the main point, not to be lost, is that workers “pay for” their own benefits. trying to obscure that with theoretical hand waving is what the professor was doing… however much in good faith.
Yes, unions pay good money to get liars elected, just like the military industrial complex does. I am sorry but unions are not always in the right. Sometimes they are, and sometimes they aren’t.
While I understand the “workers are paying for their own deferred comp” argument, the cash flow has to come from somewhere and the cash flow comes from taxes.
Since this issue is so injected with politics it is likely a nice polite accounting conversation is impossible.
Bankers in Maryland approved retroactive pension benefits, sorry not true.
Coberly, in Maryland the taxpayers have not witheld from paying anything. We have had tax hikes, several in the past few years – income taxes, property taxes, sales tax, and fees have all gone up not been witheld.
Mcwop
i agree that unions are not always in the right. the problem is, how to YOU tell when you are being lied to by the very politicians you think are going to cut your taxes.
Mc wop
of course politicians are liars, and of course the “unions” will lie too.
but as a matter of economics, it might make good sense to raise taxes when folks are out of work. the out of work won’t pay the taxes. those who have jobs will. helps to share the pain. an idea you hate if you have a job, but will understand when you are the one who doesn’t.
btw
it is no longer “the taxpayers money” after the taxpayers, through their elected representatives, have agreed to pay for the work and the workers have done the work.
ever work for a boss who renegs on what he said he’d pay?
i have. doesn’t smell any better when “the boss” is “the taxpayer.”
rusty
of course the money comes from the taxpayer. still, the workers earned it. you don’t get to go back and say… well, economic theory shows that you might not have had a perfectly free market when you negoitated the wage so we won’t pay what we promised.
if you can show fraud, that’s one thing, but an appeal to some “economic theory” that would justify reneging on every boss-worker contract ever signed is self deception at best. criminal in effect.
rusty,
Agree with you. This has been the situation from municipal to county to state level across the country.
“While I understand the “workers are paying for their own deferred comp” argument, the cash flow has to come from somewhere and the cash flow comes from taxes.” str
I fail to see how that is a relevant point since all public employee compensation comes from taxes. In fact the point is probably more salient in regards to current salary rather than pension contributions. The contribution part can be underfunded by any current administration in order to avoid the cash flow issue. Current salary cannot be put off to the future in the same manner, though government borrowing is along the same line. The essential point is that all public employee compensation comes out of taxes so there is no point to identifying some portion of that compensation as coming from the tax payers. All of the governor’s salary and those of all the legislators come out of tax payer’s pockets in the form of taxes. So what’s the point?
“This is not a case of employees negotiating with employers over a pool of profits, in which the employers are accountable to shareholders through the board. This is a case in which unions help elect the officials with whom they are negotiating. And they are not bargaining over profits, they are bargaining over tax revenue, which the government can require a third party – the taxpayer – to pay.” Jeffrey Brown
I don’t read any “facts” in that statement. It is a description of Brown’s view of the difference, in his mind, between the economic activity that takes place between public employees and the governments for which they work and the many forms of such activities that take place in the private sector. What about economic activity between private corporations and governments. Are those contracts less valid because a third party, tax payers, are going to ultimately pay the bill? Do not those corporations influence the government representatives to their favor through political contributions? Also, while private corporations have shareholders to answer to when deciding how to negotiate wage contracts, are those share holders given an opportunity to directly influence employee pay, especially executive pay which is decided by Board committees? Jeffrey Brown’s argument seems weak, and it is not based on a set of facts. It is rather his reasoning of the general issues. In effect it is only his reasoned opinion and it doesn’t seem well reasoned.
Good questions all.
I think contracts between private corporations and government, where the corporation gives any monetary considerations to elected officials to be unethical at minimum or possibly criminal. Those transactions should be banned.
Mcwop,
They should be banned? That can only be done if there is a clear quid pro quo, which is virtually never the case. The government is over run with lobbyists and professional economists whose primary personal compensation is directly and indirectly from sources funded by corporate America. They create the “wisdom” of the day. They set the tone regarding tax policy, government subsidization of industry, etc. The COB of corporation X need not go to the Congress and hand out cash. It flows in copious amounts from organizations like the US Chamber of Commerce. It flows from all of the PACs that are set up for the sole purpose of influencing elected officials at all levels. There are legislators who have served as lobbyists and lobbyists who have served as legislators. That’s the government we currently have my friend. And the majority voted them into office and the SCOTUS sanctified the process in the Citizens United case. Good luck banning that system. There is too much money at stake and our piddling concerns about conflicts of interest are not going to pull much weight.
But we digress. Johnson and Brown have given us their considered opinions. Some facts are in evidence, but the facts are the same in either case and what differs is only their interpretations of a circumstance. Bring Occam’s Razor to the task and Johnson’s argument cuts closer to the bone.
Alright McWop. Take um to the mat.
david
it may be worth pointing out that Professor Brown, a professional economist, talks about “consumption” as something that deserves “blame.” He doesn’t seem to be aware that there is always a trade off between “consumption” and “investment.” The choice is ours to make. There are perfectly good reasons why we might choose more consumption and less investment at any given time.
If we were in a condition of poverty that could be alleviated by “investment,” we might call those who chose “consumption” foolish. but we are so far from being in that condition that the country is awash in money looking for something to invest in.
The learned professor is following a “line” of reasoning when he should be looking around him at the reality… and remembering what the purpose of it all is.
Prof. Jeffrey Brown is at it again with plans to revise pension plans for public sector workers. http://businesspublicpolicy.com/?p=1368&cpage=1#comment-6810. That link goes to a second link with the meat of the post, but the first link is for the purpose of discussion. The interview, which it is, itself can be found directly here:
http://news.illinois.edu/news/11/0317pension-reform_JeffreyRBrown.html
I found this one comment near the beginning of the piece particularly curious coming from an expert. “Politically, we have the same problem with state pensions as we do with the underfunded Social Security system,” said Brown, a former member of the bipartisan Social Security Advisory Board and a senior economist with the President’s Council of Economic Advisers in 2001-2002.” My bolding. A strange claim for an expert to make.