Public Employee Pensions: Evil luxury or the last hope for a progressive society?

I just read a letter to the editor in which the writer declares he will not vote for any tax increases until pensions are completely eliminated for all public employees.  He also states emphatically that “defined benefit pension plans are a thing of the past”, and that “companies have decided they were just too expensive”.  This opinion seems to be fairly common these days as public employees are vilified for their seemingly generous retirement benefits.  While I agree that these benefits do appear generous today, the issue presents a far more important matter that we, as a society, should be debating.

In my opinion, public employee retirement benefits have not become egregiously generous so much as private employee benefits have become excessively lean!  It’s true (at least locally and in the state of California) that public pension costs have risen disproportionately during the last decade.  Returning benefits to the levels that they were at in the 1990′s is most likely a good idea that I would not oppose.  However, when it comes to completely eliminating these plans for public employees, I am not so sure that is a route we should be taking.

First of all, let us look at a little history.  Section 401(k)* was written into the tax code in 1978 and became effective on January 1, 1980**.  It created the “defined contribution” retirement plan which is more commonly known as a 401(k) plan.  Before that, most middle and large sized companies provided employees with a “defined benefit” retirement plan which is more commonly known as a traditional pension.  The 401(k) plan is nothing more that a tax-differed savings account with no guarantees of income levels during retirement.  The pension provides a guaranteed level of income for life during retirement based on the number of years of service.

More important than the difference in retirement income, is the difference in how each type of plan is funded.  The traditional pension must be fully funded by the employer.  The employer must set aside sufficient amounts of money each year and manage the investments so that it is able to meet the lifetime guarantee obligations of the plan.  This responsibility is rather onerous, and generally companies used professional money managers to handle the investments and administer the plans.  In the case of the 401(k) plan, the responsibility for funding the plan is completely shifted to the employee.  The employer might make matching contribution up to a certain capped level, but they are not required to do so, and in most plans the employer can stop making matching contributions at will, such as during down times.

So while our friend the letter writer says “companies have decided they were just too expensive”, it might be more accurate to say that companies realized they had to ability to shift the burden of retirement planning onto employees.  This shift allows companies to have much leaner operating costs and presumably contributes to greater profitability and efficiency.

However, that improved business performance has come at quite a great cost for the employee!  Since 401(k) plans are voluntary, not everyone participates (i.e. saves for retirement).  Even with automatic enrollment, most worker do not contribute enough to properly fund their retirement.  The national average for the amounts saved in 401(k) accounts across all age ranges is dismally and potentially disastrously low.  In addition, most employees lack investment management skills.  Most, simply choose a few mutual funds and let the money just sit there.  While some plans contain automatic asset re-allocation, in general the investments in 401(k) plans are not actively managed.

So while 401(k) plans may have been really good for businesses, they are actually not very good at all for the average employee.  In the three decades they have been around they have almost completely replaced the traditional pension plan in the private sector.  The question is rather workers are better off now then they were when a traditional pension was the norm.  I would argue that they are far worse off under the 401(k) system and that the average employee would be far more secure in retirement under the old system.

So, our letter writer is probably correct when he states, “defined benefit pension plans are a thing of the past.”  But, is that a good thing?  We have lost a great deal of security for the sake of greater company profits.  Combined with the insecure future of the Social Security program, the retirement landscape for my generation is looking far more precarious than that of the Baby Boomers or even the Greatest Generation before them.

So the next time you feel like a public employee is getting a free ride, remind yourself of what you have given up, or what has perhaps been taken from you.  I don’t know how we can steer our society back to a more conservative and secure approach to retirement planning.  However I do know that public employee pensions may not be such an evil luxury, as they are currently portrayed.  In fact, if embraced as a model for future retirement plans, they might be our last hope.

*Section 401(k):  As I understand it, the 401(k) plan was never intended to replace the traditional pension.  In fact, Section 401(k) was written to allow companies to provide a supplemental system for employees to be able to save in a tax-differed account on top of their traditional pension.  In fact, it was written specifically for one company, Xerox, to provide such a plan.  I have not been able to confirm the company specific reference in my research on the matter, nor have I reviewed the congressional debate over this provision of the tax code.  However, the obscure nature of the provision as simply Section 401(k) of the tax code leads one to understand that it was not intended to replace the traditional pension system prevalent in this country at the time.

** January 1980:  It is remarkable (however unrelated) that the effective date of Section 401(k) coincides with the same month that Ronald Reagan became President of the U.S. ushering in the era of Supply Side Economics (see Republican Myth #1).  It’s a incontrovertible  fact that this country has had a steady contribution of wealth since that time.  I can’t help but believe that the shifting of retirement savings burden from employer to employee may be yet another contributing factor in the nation’s long slide towards becoming a two tiered society.  Watch for the topic of income disparity and wealth distribution in future posts.

Republican Myth #3 Government Spending Hurts the Economy

As I noted in Republican Myth #1, I am not an economist.  I recognize that Ayn Rand and John Maynard Keynes pursued economics academically and came to substantially different theories.  I don’t know which, if any, is the most correct.

However on the topic of government spending and its effects on the economy, GOP ideology contains such an obvious contradiction in logic that it must be called out as a MYTH!  It can be debunked with two words, defense spending.

GOP talking points often include such phrases as “every dollar the government collects in taxes is a dollar taken out of the economy” and, “the government does not create jobs”.  These statements are of course patently false.  When the government hires a contractor to build a bridge, the payments go straight back to the private sector of the economy and, a good number of jobs are created.  Even when the government “gives” a tax dollar away through an entitlement program, that dollar is almost always spent, thus going back into the economy and certainly helping to create or at least keep jobs at the place it was spent!  (Have you ever heard of a welfare mother, or fixed income senior “investing” [sic gambling] their US Treasury check on a collateralized debt obligation?)

In the case of defense spending, the Republican politicians make the point for us.  Currently Republicans are up in arms about the potential mandatory trigger cuts that could take place at the end of this year.  As usual, they contend that cutting our defense spending will harm national security.  But this time, in the depths of the Great Recession, they are also screaming that it would cost jobs.  They say that cutting military spending could harm the fragile economic recovery and possible send us back into recession.

I’m sorry but the last time I checked, military spending was paid for with tax dollars.  You just can’t have it both ways.  If building bombs helps the economy and creates jobs, then so does building bridges, or schools, roads, and even prisons.

The simple fact of the matter is that government spending is simply one sector of our economy.  It always has been and it always will be.  Or, at least it should be.  The amount, or percentage of GDP that it represents will always be debated, and it will rise and fall continually over time.

So the next time you hear one of the GOP candidates proclaim “the government does not create jobs, only the private sector creates jobs”, think about that guy you knew that works at Lockheed or General Dynamics.  The next time you hear “government spending hurts the economy” try to remember that is only a myth.


Republican Myths #1 Supply Side Economics

I am not an economist.  I recognize that Ayn Rand and John Maynard Keynes pursued economics academically and came to substantially different theories.  I don’t know which, if any, is the most correct.

Here is what I do know.  For more than 30 years wealth in the U.S. has concentrated.  There are many ways to express wealth concentration through statistics, but no matter how you describe it, the U.S. has had a concentration of wealth for the past three decades.  This is a fact, not an opinion.  It can not be argued or spun.  It is simply the case.

What happened 30 years ago?  Ronald Reagan introduced “supply side” economics and the Republican party adopted it is as orthodoxy.  (The term “voodoo economics” is often used to demean the theory.  I love the irony that the term came to prominence when Gorge Bush ["41"] used the term to deride Reagan during the 1980 presidential campaign!)  Even before Reagan, tax rates on the wealthiest had been cut and they have continued to be lowered ever since (most recently under Bush ["43"] in 2001).  Rush and Fox don’t talk about it, but tax rates overall at currently at historic lows (even though we are supposed to be “at war”).

Supply side economics promises that a “rising tide lifts all boats”.  However, for more than 30 years now that simply has not happened (see wealth concentration in the second paragraph).  How long do the middle and lower classes have to wait before the tax cuts for the rich “trickle down”?  I was 15 in 1980.  Now I am 46, and it is getting harder and harder to deny that I am now middle aged.  Quite frankly, I am tired of waiting!

Once again, I don’t claim to know which economic theory is correct.  The issue seems to be based more on belief than on fact.  But the facts of my adult life have proven that trickle down supply side economics have simply not worked as promised in the U.S. of today (or the past 30 plus years).  Supply side economics is a MYTH!

Coming soon, other “Myths”:
-The Myth of “Job Creators”
-The Myth of “Government spending hurts the economy”
-The Myth of “We need business men to run the country”, and a few more after that!

Notes:  As noted, concentration of wealth can be expressed in many ways.  Anecdotal statistics were intentionally left out of the second paragraph above so as not to detract from the argument, because no educated informed person can deny the preponderance of fiscal evidence.  It’s a fact, wealth has been consistently concentrating in the U.S. for more that three decades (with the exception of one single year in the early 1990′s).  My two favorite “examples” are as follows.

-In the 1970′s the average CEO pay was 40 times the pay of the average worker.  Today that number is closer to 400.  (Can they work 400 more hours?  Be 400 times smarter?  Take 400 times the risk?)

-Today, wealth distribution in the U.S. is closer to that of Zimbabwe’s then to any other developed nation.  Way worse than traditionally aristocratic England.  Wow, the U.S. is more aristocratic than the country from whom the colonies declared independence.  That is tough one to swallow!