In a previous post entitled “The Razor’s Edge, Inflation vs. Deflation,” the following assertion is made:
“When the financial history of early 21st century America is written, it is interesting to wonder how historians will characterize the behavior of public sector unions, who were indifferent to deficits, who were incestuous with Wall Street, who rode the waves of unsustainable debt and deficit-fueled phony booms to guarantee their members would enjoy magnificent benefits calibrated on bubble values, but contracted to endure even after the bubbles burst. Will the refusal of all-powerful public sector unions to embrace fiscal reform be seen by future historians as contributing to the collapse of the bond markets, the pension funds – and under the burden of new taxes instead of reform, property values, as the nation’s collateral imploded? At the least, it is fair to say that what today’s leadership of public sector unions decide – whether they embrace concessions for the sake of the nation, or not – is one of the biggest opportunities remaining to avert further financial calamities.”
The point of this is certainly not to hold public sector unions solely accountable for the financial predicament facing the United States. The root cause is a 40 year debt binge that enabled unsustainable economic growth and unrealistic consumer expectations. And everyone is to blame; consumers who borrowed more than they could afford, lenders who pounced on them, and politicians who – in a bipartisan failure of leadership – failed to regulate any of it. But public sector unions now occupy a unique position of economic leverage, because with deficit-fueled debt no longer an option, restoring the solvency of public institutions can only be purchased by raising taxes or by cutting spending. Raising taxes will place burdens on consumers and taxpayers who are already contending with reduced wages, high rates of unemployment, and crippling levels of debt. Cutting government spending is the only option.
In-turn, how government spending is reduced is crucial. By cutting future benefits, for example, such as future pension obligations to government employees, no money is removed from the economy today. Similarly, by freezing all government worker salaries, budgeted salary increases can be eliminated, saving jobs and reducing deficits instead. Public sector unions may have the opportunity, through dramatic concessions on wages and benefits for their members, to literally save the American economy from deflationary collapse.
Is this equitable? Should public sector employees forfeit their generous pensions, suspend their cost-of-living increases, and even take pay cuts? Public employee unions typically argue that government deficits can be closed simply by raising taxes only on wealthy individuals and profitable corporations. Whether or not this argument is valid, it completely misses the point. Government spending – no matter how the revenue is raised – needs to prioritize infrastructure investments, technological initiatives, and national security. Government spending should not be squandered to pay grossly over-market rates of compensation to public sector employees. Primarily using California as an example – since California is the poster-child for an American unionocracy – here are some economic points to back up this assertion:
(1) COMPARING PAY – PUBLIC VS. PRIVATE
The average state or local government worker in California makes $59K in base pay and earns at least another $30K in benefits – $90K per year. California’s average private sector worker makes $41K in base pay and earns about another $10K in benefits – 51K per year. California’s government workers average pay is nearly twice that of the private sector (ref. California’s Personnel Costs, U.S. Census Data, and Reason Foundation Study).
(2) COMPARING RETIREMENT – PUBLIC VS. PRIVATE
The maximum social security benefit is $31K per year, paid to retirees with a final salary of $125K+ per year (17%). Again using California as an example, there is no maximum public sector pension benefit – no percentage or absolute ceiling. On a percentage basis, a public safety pension averages 5x-7x greater than social security. Similarly, a non-safety public pension averages 3-5x greater than social security. On the basis of the actual dollar payout, the disparity is even greater (ref. Social Security Benefits vs. Public Pensions and Social Security Benefit Estimator).
(3) COSTS OF BENEFITS ARE UNDERSTATED
Current year payment obligations for the future pension benefits of public employees assume an over-optimistic rate of investment fund return. If you cut the projected rate of fund return by 50%, you double the funding required. In addition, most government budgets don’t recognize costs for future retirement health insurance. The benefits overhead for public employees is understated on most government budgets by at least 50% (ref. Real Rates of Return, Pension Funding & Rates of Return, and Maintaining Pension Solvency).
(4) FUNDING SOCIAL SECURITY VS. PENSIONS
Social Security serves 80%+ of retirees with benefits averaging 1/3rd of final wages, and projects a 2 to 1 worker/retiree ratio. Public sector pensions serve 20% of retirees with benefits averaging 2/3rds of final wages, projects a 1 to 1 worker/retiree ratio, and retiree payouts begin 10+ years earlier than Social Security. Notwithstanding fund returns, social security requires 16% of salary withheld, pensions require 66% of salary withheld. Total pension payments to public sector retirees, representing 20% of the population, are on track to equal, in absolute dollars, total Social Security payments to the other 80% of retirees in America – four times as much money per recipient. Social Security can remain solvent with relatively minor adjustments, public sector pensions are grossly insolvent and cannot be salvaged without major benefit reductions (ref. Sustainable Retirement Finance and Funding Social Security vs. Public Pensions).
And how did it come to this?
UNION POLITICAL SPENDING
In California there are just over 1.0 million unionized public sector workers (this represents about 55% of California’s 1.85 million state and local workers, but nearly all of them enjoy union-negotiated pay and benefits). Average union dues are at least $750 per year per member. At least 33% of union dues are allocated to political activity – lobbying & election campaigns. This means public sector unions are spending $250 million per year on politics in California. There is no comparable source of political spending, and to the extent other special interests participate financially in politics, their agenda is diverse, and rarely if ever devoted to fighting the public sector union agenda of more government workers, and higher government worker compensation packages (ref. Public Sector Unions & Political Spending).
It is difficult to overstate the impact of public sector unions. For years, they have coerced politicians who they can make or break with massive political spending into granting unsustainable and unwarranted rates of pay and benefits for public employees. In California, their unfair advantage in political spending has given them effective control of most state and local politicians. The union work rules, ostensibly to protect worker’s rights, have lead to an unaccountable workforce, damaging the effectiveness and efficiency of all our public institutions – what public sector unions have done to public education is a tragic example. Public sector unions undermine democracy and have bankrupt our state and local governments.
Public sector unions hold the key today to saving the economy of the United States, because with their consent, we can freeze government worker wages, even reducing them in some cases, and we can reduce their defined retirement benefits to something moderately greater than social security instead of 3x-7x social security. Eventually, with reformed work rules, we can begin to downsize and improve the quality of our government workforce, and if we act soon, that may be even possible mostly via attrition. If all of this is done, government deficits will quickly disappear without decimating government programs and services, or precipitously lowering current worker pay. This would enable us to actually begin shrinking, year over year, government debt – which is the most persistent and alarming category of debt in the American economy. And as this occurs, we can begin to use government surpluses to make genuine investments in our future.