How to Make Everything Perfect Forever, Part Four.

One of the issues many state and municipal governments are facing is that of pensions for public employees. Wisconsin, you may have heard, is having itself a minor kerfluffle over the matter as we speak.

Some folks say that the problem is that public pensions are woefully underfunded; that governments aren’t collecting enough tax revenue to pay for them. Other folks say that the problem is that the pensions are– or soon will be– unsustainably large.

This leads to a whole bunch of arguments, such as: Should taxes be raised? If so, how much and on whom? Should other expenditures be cut to provide the money to fund these pensions? If so, which programs? How much? And then, of course, there’s the politically suicidal question of whether the pensions themselves should be cut, and if so, how much.

These are not fun conversations to have. These are not simple conversations to have. But the fact remains that various governments promised that pensions would be paid, and they’ve got to keep those promises (or, if you’re really sneaky, find politically acceptable way to break them).

But I must ask: why make a promise that’s so tough to keep–especially if you don’t have to? Paying pensions to current and past employees is one thing, but do state and local governments have to keep promising pensions to new employees?

No, they don’t. Therefore I make the following proposal, which will simplify state and local government finances:

No state or local government should offer pensions to any new employee. Take whatever cash the government would have put away into a pension fund and give it directly to the employee as additional wages or salary. The employees will have the freedom to spend those extra dollars as they see fit, which might include investment in a retirement plan.

There would be big political problems with my proposal. Some folks don’t know how to handle their money, and would inevitably whine about being broke when they retire. Oh well. Some current employees would complain that it somehow isn’t fair that new employees have this option but they don’t. Too bad. Governments might complain that switching over to a new system is too complicated and blah blah blah. Get over it.

There’s a huge upside (in my book): there’s one less future obligation that states and local governments have to worry about keeping. They would be forced to focus on cash flow now instead of trying to attract new employees with deferred compensation that some future generation would have to take care of. And there’d be less discussion about who really funds pensions (i.e., who bears the burden of pension funding, which is different economically than it is accounting-wise). In Wisconsin there is great concern over the prospect of teachers having to contribute 5.8% towards their pensions– under my proposal, new teachers, new cops, new firemen, etc., would have extra salary (which, remember, is the cash that governments are supposed to be putting into pension funds anyways) and would be 100% responsible for their own retirement, if that’s how they choose to spend their money.

I think this would clarify finances for states and municipalities. My proposal wouldn’t take a current-year fiscal deficit and instantly turn it into a surplus–that’s not the point. The point is that this would clarify finances for states and municipalities, by removing the factor of future payments (pensions). No more of this economically meaningless nonsense over what percentage whoever should contribute towards pensions. Just two nice, simple questions: do we have enough to pay our employees, yes or no? If so, great. If not, do we raise taxes or make cuts?

In order to simply the discussion as much as possible, I left out any mention of insurance plans. But we could make a similar proposal about various forms of insurance. I think all these forms of payment aside from salary have overcomplicated government finances and fostered– perhaps deliberately– economic ignorance.

6 comments

  1. The problem with insurance is that people want it to pay for a simple medical check-up, ect… If the employees plans were only give the coverage for big item issues like a broken arm ect…, then everything woulf be hunky dory (in comparison in now). But in the day (when my parents were children) insurance was, in the words of Chris Rock, “In case #$%^ happens,” and it worked out perfectly.

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  2. I felt reading this what I can only describe as pride for having reached independently the same conclusion in regards to municipal pensions as the greatest economist to have ever roamed the hallowed breezeways of Paxon.

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  3. Just to be clear (and I’m not claiming that anyone’s accused me of this), I do not think that municipal pensions are inherently bad, or that those who want them are inherently selfish, greedy, evil, or any such thing. I think that they are unnecessarily complicated, and that they unnecessarily complicate government finances. Simplify. Just stick to salaries and wages.

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  4. I definitely agree, my father is a DCPS employee so I have some view on this issue I suppose. While there are those who are greedy, the majority of those expecting some sort of pension simply expect it because it is exactly that, the expectation, or at least it was when they went into the job. I feel so long as employees are aware of the fact they need to save for their own retirement from the get go, that they are fully capable of managing their own money, often better than a bureaucracy would be in any case. And if they are not, “Oh well…too bad”.

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  5. I’d be interested in Dom’s opinion of state entities that offer defined contribution plans. They’re probably too complex.

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