Thursday, August 1, 2013

Killing Pensions with the Welfare Queen Strategy

Killing Pensions with the Welfare Queen Strategy

In the early 1980s, Ronald Reagan painted the picture of a single mom taking advantage of the welfare system in order to erode public support for government programs to aid the poor.  The image helped to turn the public against welfare and poor people.  A decade later, President Clinton was proud to “end welfare as we know it.”  The same strategy is being used to destroy public pension plans.
Critics of public pensions are pointing to the forty-something year old policeman or fireman who qualifies for a full pension, and then has a second career.   They also cite the case of the schoolteacher who puts in twenty-five or thirty years of service, retires, and then goes to another state to teach.
 
Marketing to Small Accounts (1999)
Let’s start with police and fire professionals who typically qualify for pensions after about 20 years on the beat.    First, there’s a good reason why folks in these professions qualify for a pension after about two decades of employment: they do extremely difficult and physically taxing work.  There seems to be a visceral reaction when these public servants have a second career after they retire.  It’s odd to me that we single out public employees, but think it’s okay for executives and other professionals to collect their pensions, and go on to lucrative careers as consultants and board members.

Our police and firefighters haven’t done anything wrong.  They signed up to provide at least 20 years of public service in exchange for a salary, pension, and other benefits.  The problem is that our legislators did not put set aside enough money to properly fund those pensions.  Moreover, they encouraged pension officials to use unrealistically high assumptions for investment returns as a way to hide the true liability. By the way, over the years the policemen and firemen probably contributed more to their pension than the public. Critics conveniently forget that almost all public pension plans require employees to contribute 4% to 6% of their salaries. Now that the bills are coming due, we prefer to vilify pension recipients rather than confront our obligation to our public servants. 

As for teachers who take another teaching job after retiring, they too are playing by the rules.  More importantly, the extra job is probably a financial necessity.  Teachers’ salaries have been stagnant for the better part of a decade, so it is prudent for many teachers to find a way to supplement their retirement income.  Getting a job after qualifying for retirement is a sensible move.

Many taxpayers aren’t eligible for defined benefit plans because corporations have been eliminating them for years.  Thus when politicians turn policemen, firemen, or teachers into the pension equivalent of a welfare queen, the argument resonates.  Rather than arguing that public servants should be stripped of their pensions, taxpayers should be demanding that every citizen have a defined benefit plan.


8 comments:

  1. Most citizens do have a defined benefit plan - Social Security. Most citizens don't criticize the actual pension recipients as welfare queens- they criticize situations when government unions negotiate with government officials to negotiate pensions that are not in taxpayer's interests when, like you say, they are not backed up by honest budgeting.

    The "good old days" of pensions for everyone are over. Defined contribution is where things are heading and puts individuals in charge of saving for their own future, instead of counting on their employer or their government to invest responsibly on their behalf. That's not a bad thing, and moving in that direction for public servants helps ensure that taxpayers have a better understanding of the full cost of their compensation. I'm not saying whether public employee compensation is too high or too low right now, it's just not transparent under a defined-benefit plan, and taxpayer-funded compensation to any person or interest should be as transparent as possible.

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    1. Your point about Social Security is well-taken, it is a form of defined benefit. However, I disagree with the second part of your comment. While the trend has, undoubtedly, been toward defined contribution plans, individuals are not in charge of their own futures. If wage growth hadn't stagnated for the past 20+ years, and if financial markets were a bit less volatile, it might be reasonable for individuals to take control of their investment futures. Moreover by pushing retirement savings to individuals, the fees associated with investing are substantially higher, which is a huge drag on generating retirement savings. As for transparency, DB can be as transparent as DC plans, if the politicians and accounts use realistic methods. In the end the real question is how society deals with the retirement. We can use DC plans and pretend that retirements have been adequately funded. When the DC plans fail to do the job, government winds up picking up the expenses anyway through Medicaid, food stamps and other social programs.

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    2. So this is certainly where we have different philosophies on the role of government in society- you have stated yours quite eloquently and thank you for hearing mine out. I'm grateful for what you're doing overall to describe where markets and governments are acting inefficiently and unfairly, and I believe it will make a difference since you have a wealth of experience to draw from.

      Remember though that there are millions of people like myself, who DO believe in our individual abilities to invest successfully and take the time to study and understand how to achieve our financial goals- because success never comes easy. We also simply do not trust government to manage this better than we can, because the interests of politicians contradict the aims of "realistic methods" you describe above. I wish they did, but they don't.

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  2. Interesting and totally valid point. How do you feel about politicians and journalists now referring to Social Security benefits as "entitlements"?
    Aren't they more accurately described as "earned" benefits? Doesn't the word entitlement have a negative connotation of something being given instead of earned?
    Do you think politicians are trying to show the Baby Boomers as deliberately draining Social Security, instead of withdrawing money paid into the system?

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    1. What we call things can have a big impact on the policy debate. Perhaps the most famous example, is the characterization of the estate tax as a death tax. Social Security is an "earned benefit". However, the benefit ins't merely the withdrawal of money paid into the system. Current employees will "subsidize" payments to baby boomers, which is why the fund will draw down in the next several decades.

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  3. Well, Social Security benefits are entitlements- based on your contributions during your working years, per the law you are "entitled" to certain benefit levels. It sounds worse than earned benefits, but the two terms mean the same thing, and entitlements is not a false term.

    Baby Boomers are going to drain Social Security at current rates, but I don't know how they could collectively do so "deliberately"- unless Baby Boomer politicians refuse to fund the system for the benefits it currently promises, or reforms the benefits to match the expected revenues. Things aren't going well in that regard...

    What are your thoughts?

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  4. Joel -- agreed, but the common meaning of words tends to get distorted in the political world and then have a particular and often negative meaning. It turns out that the words matter.

    I also agree that Social Security isn't a crisis if the politicians agree to fun it. However, in this environment that's asking a lot. The medical programs are a much bigger problem given the unending pressures of cost increases.

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  5. Speaking of the medical programs... How will the Affordable Care Act figure into all this? Will it help or hurt recipients of Medicare? I know many people say "they don't want the government dictating their healthcare", but it has to have some regulation, and would they rather let the insurance companies do it (fox guarding the hen-house scenario)?

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