How Unions Can Save America

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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.

Dramatizing the Inequity

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This is a hilarious video that is accurate and nicely summarizes our challenge – our state and local governments are going broke in order to pay not only for pensions that are 3-5x more generous than social security, but for overall compensation and benefits to public employees.  To balance budgets, we don’t have to cut services or raise taxes, we just need to reduce the grossly over-market compensation paid to public employees. Warning – while clever and accurate, this video does contain foul language…

http://www.fullertonsfuture.org/2010/stop-the-madness-now/

By the way, I have personally verified the compensation parameters referenced in this video, as summarized in this post:

https://civicfinance.org/2010/08/27/the-cost-of-firefighters/

Inflation, Population & Government

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For several months I have been privileged to receive informational emails from Senator Jeff Denham, who represents California’s 12 Senate District, a verdant (if gerrymandered) expanse of land that includes vast swaths of the San Joaquin Valley, along with virtually all of the beautiful Salinas Valley to the west. Senator Denham has been resolute in his opposition to California’s economically disastrous, politically opportunistic Global Warming Act, which has earned him credibility here, and hopefully elsewhere.

Today Senator Denham’s email dealt with another topic, the size of California’s state government, another area where Denham’s stated preference for smaller state government earns him additional points. Today’s email included some comments from one of his constituents that bear analysis – here they are:

“…in 1970, California took in 28 percent of state revenues from personal income taxes. Fast forward to 2010 and you find the state now pulls in a whopping 52 percent of its revenue from personal income taxes. During this same time period, our state budget increased from $6 Billion to $120 billion, an increase of approximately 2,000 percent. All the while, our population has barely increased 100 percent. As such, you could say that for every 1 percent increase in population, our spending has increased 20 percent.”

These are dramatic numbers – but they are misleading. Unlike people, who cannot be devalued, currency is a fluid asset, whose value is only pegged relative to other currencies and the commodities we use currency to purchase. And by this measure, Denham’s constituent has made a point we must attenuate. A good online source for compiled CPI (consumer price index) measurements is the website US Inflation Calculator, where there is a chart entitled “Consumer Price Index Data from 1913 to 2010.”

If you review this CPI chart, which references a “base year” of mid-1983, and reports the estimated purchasing power of a dollar for years before and after 1983, you will see that the year 1970 had an index of 37.8, and 2010 has an index of 216.7. This means that what a dollar would have purchased in 1970 would cost $5.73 today. While the CPI index is itself subject to criticism and is certainly not 100% accurate, it is obvious there has been inflation since 1970. In 1973, for example, the Big Mac burger made its debut, priced at $.50. Today a single Big Mac sandwich costs about $3.00. Similarly, homes that cost $50K in 1970 cost about $300K today (or more; the rate of price increases for residential and commercial real estate have exceeded the rate of inflation over the past decade – hence the deflationary pressures we’re currently facing).

So while Senator Denham is on the right track when he compares – and deplores – per capita government spending today vs. forty years ago, he needs to normalize not only for population, but also for inflation. The operative assumption requiring modification is this:  “During this same time period, our state budget increased from $6 Billion to $120 billion, an increase of approximately 2,000 percent.” In reality, the $6 billion needs to be increased by a factor of 5.73, which means $6 billion, in today’s dollars, would be $35 billion. This represents a growth in spending of 340%, which means that for every 1.0% annual increase in population, California’s per year state government spending since 1973 has increased 3.4%, not 20.0%.

Should California’s state government spending increase at a rate of 3.4x the rate of population increase? Absolutely not. But Senator Denham and other sincere and courageous advocates for limited government will not as effectively advance their agenda using statistics that cannot bear the light of day. Economics is called “the dismal science” for good reasons, and Mark Twain’s old adage that there are “lies, damn lies, and statistics” has endured as a favored quote for good reasons. But this doesn’t absolve any of us from making ongoing and sincere attempts to extract the truth from the myriad sea of numbers – because the truth exists, even if it isn’t precisely knowable – and because with integrity, instinct, intuition and reason, we get closer to that truth. And if our clear intention is to find the truth, even if that truth appears disruptive and disturbing, then our findings may convince not only those who already agree with us, but those multitudes who are still searching.

As it is, Senator Denholm is right, and his point is valid – California’s government is big enough, and should not grow at a rate more than triple the rate of population growth – particularly since today most of California’s politicians don’t want to use taxpayer’s money to build anything, but would rather use government as a weapon to restrict infrastructure development in favor of bloated wages and benefits for unionized government bureaucrats.

Pensions: Giant 401K Plans

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One of the biggest apparent misconceptions on the part of those who believe public sector pension benefits can remain unchanged is that somehow there is a difference between 401K plans and public sector pension funds. The only difference is one of scale. Individual citizens save money and invest the money in a 410K plan or other individual retirement account. Public sector pension funds take vast sums of money and invest it in the very same places – primarily Wall Street equities.

While it is true that an institutionally managed, massive and diversified pension fund may be less volatile than an individually managed retirement account, it is also true that massive pension funds are far less likely to enjoy returns that beat the market. They’re too big. So when the market value of stocks and other assets fall, it is impossible for large pension funds to not also see their values also fall.

If you recognize this – the fact that public sector pension funds are just as subject to economic ups and downs as individual 401K funds, and that they are invested in exactly the same things – then comments by defenders of keeping the public pension benefit system unchanged become inexplicable.

President Obama, in a speech last month where he lambasted the nonexistent Republican plan to privatize social security, said “I’ll fight with everything I’ve got to stop those who would gamble your Social Security on Wall Street.” But public sector employee pension funds are themselves gamblers on Wall Street.

SEIU Executive Vice President Eliseo Medina, in a Sept. 3rd commentary on the Huffington Post entitled “Wall Street is to Blame for Pension Shortfalls,” claims “For generations, Americans have counted on three sources of retirement income: social security, employment pensions, and personal savings. Wall Street is bent on undermining all three by pushing risky social security privatization schemes…” and further states, “Their goal is to strip away guaranteed pensions and force more workers into 401k-style plans that put all the risk onto workers while putting more money into the bankers’ own pockets.” But Wall Street returns are the only way pension funds can project solvency. Wall Street has already robbed the private sector taxpayer, and now those same taxpayers will have to also cover the losses of the pension funds, who gambled taxpayer’s money on Wall Street?

The President of the Los Angeles Police Protective League, Paul Weber, in an editorial published last month entitled “Public employee pension ‘reforms’ recipe for disaster” wrote “the 401K approach to retirement savings is, and will continue to be, an absolute disaster for this country.” In the same editorial, he goes on to say “while public pension plans have also taken severe hits, they have a long-term investment outlook, and their obligations aren’t due in full in the next five, 10 or even 20 years.” But all this means is that pensions are gigantic 401K plans, administered by professionals, managed over decades, but still reliant on Wall Street to survive.

What Obama, Medina, Weber and others don’t seem to fully recognize is that (a) massive public employee pension funds are themselves gambling with Wall Street just as much as any 401K plan participant, (b) the Wall Street crash was the result of a debt bubble that was built with the avid collusion of Wall Street, the government, and feckless consumers, and (c) long-term return on investment projections for large pension funds based on a 40 year expansion of unsustainable credit are too high for the era we now live in, where collateral continues to shrink and credit lines collapse apace.

Here are some additional thoughts:

(1) Social Security serves 80% of the retired population with benefits that on average are one-fourth what public sector pensioners receive, because they pay out 1/3rd vs. 2/3rd of recent salary, and because they begin payments 10 years later than public pensions.

(2) The absolute dollars necessary to pay Social Security to 80% of our retired population are therefore approximately the same amount as the absolute dollars necessary to pay public sector pensions to 20% of our retired population. The same size liability for one-fourth as many people!

(3) While in the past public sector employees made less than their counterparts in the private sector, in exchange for better benefits, that hasn’t been the case for over ten years. The average private sector worker in California earns less than $60,000 in total compensation (including all benefits). The average public sector worker in California earns about $100K in total compensation – nearly twice as much.

(4) Social Security is not in danger of going insolvent – it can be fixed with incremental changes; a higher ceiling on withholding, a higher percentage withholding, an older retirement age, and slightly lower benefits. Social Security is an appropriate taxpayer funded system of retirement security. In conjunction with personal savings, eliminating debt, and no new taxes, Social Security enables retired workers to live with dignity.

(5) Public sector pensions rely on the whims of Wall Street just as much as 401K plans. To demonize Wall Street at the same time as resisting calls to reduce public sector pension benefits is grotesquely hypocritical. Public sector pension funds are in bed with Wall Street, transferring over $250 billion dollars of taxpayer’s money through Wall Street brokers every year.

(6) If the inflation-adjusted projected rate of return for public sector pension funds were lowered from 4.75% to 2.375%, the contribution rates into these funds would rise from between 20-35% of salary (non-safety vs. safety) to between 40-70% of salary. This is not possible. This is why pension fund managers are making increasingly risky investments on Wall Street instead of admitting they will not be able to sustain 4.75% rates of return any longer.

(7) The solution to public sector pension plan insolvency – and they are all insolvent once you admit 4.75% returns will no longer accrue to trillion dollar funds in a debt-saturated, stagnant economy – is to move to a pay-as-you-go system, just like Social Security. Current tax receipts should be used to pay current retired workers.

Defenders of the status quo seem to embrace the seductive notion that Wall Street will solve all of our retirement security problems for public sector workers at the same time as they indulge the urge to demonize Wall Street for the failures of 401K plans. This contradiction escapes them, as they expect private sector taxpayers cover not only the downside of their individual retirement savings losses, but also whatever losses may accrue to the public employee’s pension funds.

Sustainable Retirement Finance

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When assessing the financial sustainability of any government administered plan to provide retirement security to their citizens, it is important to consider two factors, (1) the nation’s overall population demographics, and (2) the economic model of the plan. In-turn, when evaluating the economic model of the plan, it is important to consider the plan’s sustainability apart from reliance on returns from passive investments. It is important to assess how well a government-funded retirement benefit plan can be supported via a pay-as-you go system, where each year, tax assessments on current workers are used to pay retirement benefits for retired workers.

In the United States, there are two government operated financial systems that administer our collectively funded, i.e., taxpayer funded programs to pay retirees a certain amount each year that they may live comfortably. One may assume a great range of thresholds to define “comfortably” but in any event these two systems are very distinct, in ways that are fairly easily explained. They are social security, for which about 80% of the U.S. workforce participates, and public employee pensions, for which about 20% of the U.S. workforce participates.

Social security is based on the assumption that participants work, on average, from the age 25 to 65, then are retired from age 66 to 85, i.e., there are two participants in the work force for every one recipient who is retired. Social security, on average, also may assume that payments to retirees average one-third what earnings are by workers. On this basis, on-sixth of a worker’s wages, or about 16%, are required to be additionally assessed in order to fund payments to retirees on a pay-as-you-go basis. Social security clearly can remain sustainable, as long as it maintains the current two-to-one ratio of workers to retirees, and also pays on average one-third in retirement benefits compared to what current workers earn.

This relatively sanguine outlook for the future of social security is supported by that other key factor, demographics, particularly in the United States. For people born between the years of 1956 through the present, there about 20 million citizens for every five year age-group, from zero to 5, through 50 to 55. This means these projections will not be undermined by an aging population. The United States has a serendipitously even stream of people insofar as every age group is equally represented numerically, from today’s babies through baby-boomers born in the 1950s (ref. Funding Social Security vs. Public Pensions).  America’s social security system as it is currently formulated is financially sustainable, and unless it dramatically changes its benefit formulas, will be for at least the next 50 years based on existing age demographics; probably much longer. The formula of 16% withholding for one-third average earnings in Social Security payments is eminently sustainable, without reliance on investment earnings.

When one considers the average years retired vs. worked, and the average annual pension as a percent of average annual per worker earnings, and compares public sector pension benefit formulas with social security benefit formulas, a completely different picture emerges. Public sector pension benefits, when evaluated on a pay-as-you-go basis – wherein current workers support retirees via current assessments – require far more withholding from total compensation. Here’s why:

The average public sector workers enjoys a one-to-one ratio of working years to retired years, unlike the social security system, which only provides a benefit based on a two-to-one ratio of working years to retired years. Public sector workers on average work from age 25 to 55, then are retired from age 55 to 85 years, one-to-one. Private sector social security recipients work from age 25 to 65, then are retired from 65 to 85, a two-to-one ratio. But the disparity doesn’t end there.

The average public sector worker – averaged based not on formulas for safety vs. non-safety workers, but at a blended rate incorporating the collective reality of all government workers – enjoys a retirement pension that is not, on average, one-third of what the average worker earns, but is instead two-thirds of what the average worker earns, twice as much. So if public sector worker retirement systems were funded via pay-as-you-go assessments, with each worker being responsible for supporting one retiree, they would have to have the system allocate an amount equivalent to 66% of their salary, an additional two-thirds on top of what they make, to be paid out to a public sector pensioner.

The financial sustainability of public sector pensions depends on 66% of each worker’s earnings being simultaneously paid out to a public sector retiree, the financial sustainability of social security depends on 16% of each worker’s earnings being simultaneously paid out to a social security recipient, less than one-fourth as much. No wonder public sector pension funds have become a collection agency for Wall Street, as their aggregated 401K plans tumble and toss upon the speculative waves of global finance, and are chary to simply ask for twice as much or more to be collected, from the taxpayers, now and forever to sustain public employee retirement pension payouts. As it is, about $250 billion per year of new money pours into Wall Street via public sector pension fund collections from state and local government payrolls (ref. The Axis of Wall Street & Unions).

It is ironic at best how spokespersons for public sector employee unions (also known as “associations.”) and even spokespersons for public sector employee pension funds are fond of accusing taxpayer groups and others concerned about unsustainable public sector pensions of “throwing us to the same fate as those private sector workers and their underwater 401K retirement funds.” Don’t they realize these taxpayer-funded public sector pension funds are themselves still merely gigantic 401K plans? Don’t they see the irony of holding private sector taxpayers accountable not only for our own losses at the hands of those Wall Street sharks, but also holding private sector taxpayers accountable for public employee pension fund losses at the hands of those same Wall Street sharks? Are government workers and their associations, however well-intentioned, complicit in or at least condoning this sustainability disparity because they like to retire collecting twice as much money for ten extra years?

California Firefighter Compensation

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On August 4th an interesting analysis of public sector compensation was posted on the blog Inflection Point Diary entitled “How to Figure Out How Much Money a Local Government Manager Makes.” In this decidedly conservative analysis, the conclusion was that “real annual compensation [is] at least 33 percent higher than the ‘salary’ the city would have told you about if you called to ask this question.”

This 33% is typically called salary overhead, and must include the current year funding required for everything not included in straight salary – such as the value of all current employee benefits, as well as the current year funding requirements for all future retirement benefits for the employee. In the private sector, a generous overhead percentage would be about 25% – about 9% for the employer’s contribution to social security and medicare, a 6% employer contribution to the employee’s retirement savings account, and roughly another 10% for the employer’s contribution towards the employee’s current health benefits.

If only the difference between private sector employee overhead were only 33% vs. 25%, however. In reality, because public sector employees receive defined retirement benefits that are anywhere between 3x and 10x (that’s right 10x, ref. Social Security Benefits vs. Public Sector Pensions) better than someone with a similar salary history can expect from social security, and because these future benefits must be funded as part of a public employee’s total compensation each year, public sector salary overhead can often reach 100%. This is particularly true for public employees who work in safety-related occupations, such as police officers and firefighters (ref. The Price of Public Safety). With all this in mind, how much do firefighters really make?

To perform this analysis I obtained payroll data for the firefighters employed by the City of Sacramento. The data is for the most recent 12 months, and does not include the top management of the fire department. It does include data for 543 individuals. The numbers are probably a bit low, on average, because there are undoubtedly people on this list who didn’t complete a full year of work, but the calculations to follow will assume all of the payroll data represents 12 months of full-time work.

In terms of basic pay, the “base hourly earnings” of Sacramento’s firefighters was $74,000 per year. Overtime, on average only added $10K to that total, which suggests that – at least in Sacramento’s case – overtime is not creating a crippling additional burden to the department expenses. But when you add “incentive earnings,” “holiday payoff,” “other earnings,” “sick payoff,” “other payoffs,” and “vacation payoff” to the total, the average firefighter in Sacramento makes $101K per year. This does not include health and retirement benefits, however.

To get to the true number, I then reviewed the current Labor Agreement in force between the Sacramento Firefighters Union Local 522, and the City of Sacramento. I then verified with a senior attorney with the City of Sacramento that certain of my assumptions were correct. In particular, the City pays 100% of firefighters current and retirement health insurance benefits, and the City pays 100% of firefighters retirement pension contributions. So what is all of this worth?

Calculating the value of current benefits is relatively easy, particularly if you simply want to pick a conservative number. In the firefighters labor contract, health insurance benefits are covered up to a maximum of $1,200 per month, and after 20 years of service, the City pays 100% of this coverage for life. The City also pays a uniform reimbursement of $871 per year, tuition reimbursement of up to $1,500 per year, along with life insurance, and subsidized parking or subsidized mass transit benefits. There are certainly other benefits not identified in a relatively cursory review of the 81 page labor agreement Sacramento’s firefighters are under, but it is fair to assume the value of current benefits averages about $12,000 per year, raising the total compensation for the average Sacramento firefighter to $113K per year. But we haven’t yet accounted for the current year funding requirements for future benefits, such as retirement health and pension payments.

If you refer to Sacramento’s reported payroll data, the average pension fund contribution per firefighter per year is $31K, which means – since the City pays 100% of this contribution and the firefighters contribute zero in the form of payroll withholding – the average compensation for the average Sacramento firefighter is actually $144K per year. But it doesn’t end here, because these pension fund contributions are based on CalPERS official return on investment projection for their fund, which is 4.75% per year, after adjusting downwards for inflation. I would argue that the chances that CalPERS is actually going to earn this sort of real, inflation-adjusted return is zero. For much more on why it is absurd to expect a 4.75% year-over-year return on hundred billion dollar funds in this era, read The Razor’s Edge – Inflation vs. Deflation, Pension Funding & Rates of Return, and Sustainable Pension Fund Returns.

For these reasons, a truly conservative fiscal strategy for pensions would be a pay-as-you-go model, where pension fund allocations aren’t even invested because the present value of the money is not discounted. Using such assumptions would go a long way towards guaranteeing solvency to pension funding, and would dismantle the pernicious alliance of public sector pension funds and Wall Street brokers and speculators (ref. The Axis of Wall Street & Unions). And why should public sector employees collectively invest taxpayer’s money into public equities and other private sector investments where they (1) exercise influence over the management of these companies as shareholders, (2) reap the sole benefit of windfall returns from these investments when they occur, and (3) compel taxpayers to make up the shortfall whenever these investments do not perform adequately? But just in the interests of presenting a realistic calculation of what firefighters in Sacramento are really making each year in total compensation, let’s use a rate of return that might actually be achievable, one-half the rate CalPERS clings to, a return of 2.375%. What happens?

As explored in the posts Maintaining Pension Solvency, and Real Rates of Return, where charts are depicted showing the entire logic of this calculation, if you assume 30 years working, 30 years retired, a pay history wherein annual salary doubles in real dollars over the employee’s career, and a retirement pension based on 90% of the employee’s final year of pay, at a fund return of 4.75%, to maintain a solvent pension fund you would have to set aside 30% of the employee’s salary each year. This 30% calculation is a bit lower than the percentage actually being set aside by the City of Sacramento for their firefighters. The 34.9% of salary that Sacramento contributes into CalPERS for each firefighter probably reflects the fact that CalPERS is currently underfunded, plus other more conservative assumptions than are made in this simplistic example. The point is this: If you make these assumptions and use a projected rate of return of half what CalPERS still claims they can earn, you will get a result that is, if anything, too low. And based on a rate of return of 2.375%, it is necessary to contribute 60% of salary into CalPERS each year to keep each firefighter’s pension solvent.

Total compensation has to include current year funding requirements for future benefits. Using a realistic rate of return of 2.375% (after adjusting downward for inflation), pension funding requirements double, which means the average firefighter in Sacramento – if these pension commitments are honored – is really making $174K per year. And while the City of Sacramento doesn’t accrue for, much less fund, their future obligation to provide retirement healthcare benefits to their firefighters, it is still a liability, and it is still necessary to apply the present value of these future costs to the years these employees are actually working. This fact will easily put the annual total compensation for the average Sacramento firefighter at $180K per year.

So how much do firefighters in Sacramento work, in order to earn $180K per year on average? Returning to the labor agreement, firefighters working the “suppression” shifts, i.e., most of them, the guys who staff the firehouses and are on call 24 hours per day, typically work two 24 hour shifts every six days. That is they work a 24 hour shift one in every three days. During these 24 hour shifts, most of the time, they have time to eat and sleep, in addition to performing their duties. But if you review the agreement, you will see that by the midpoint in their careers, after 15 years, firefighters will earn the following quantity of 24 hour shifts off with pay – 6.53 for holidays, 9.33 for vacation, and 2.0 for personal time. This means, not including sick leave, the average firefighter works 2 shifts of 24 hours every 7 days. Two days per week. This estimate is not significantly skewed by overtime pay, since on average, Sacramento firefighters are only logging about 8% overtime hours.

One can make as much or as little as one wishes with these numbers. There is nothing here suggesting firefighters are overpaid or underpaid. Because before having a discussion regarding whether or not firefighters are overpaid or underpaid, it is important to simply present the facts – here is how much firefighters are paid. It is left to each reader, voter, financial analyst, policymaker, and firefighter to ask themselves:  Should firefighters make $180K per year, on average, to work two 24 hour shifts per week, and can we afford this? And should the premium, in terms of salary overhead, for public safety personnel be nearly 100%, if not more?

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Public Sector Unions & Political Spending

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Working from the bottom up, it is virtually impossible to extract accurate figures to quantify just how much money public sector unions spend on political activity. For example, money spent at the state level on politics, as tracked by the National Institute on Money in State Politics, or, in California, as tracked by the California Fair Political Practices Commission, only track one subset of political spending. These figures, staggering though they may be, don’t show data for local races (every city council, county board of supervisors, water board, school board, police commission, fire commission, etc.) – and, equally significant, these databases are unable to clearly identify the source of donations that have been run through foundations or independent expenditure campaigns, or political parties – often several times – before appearing on a candidate or issue campaign’s disclosure report.

For these reasons, in order to get a good idea of what public sector unions are really spending on political activity, you have to work from the top down. Using California as an example, you can estimate how much public sector unions spend on state and local politics each year if you can accurately identify three variables: (1) How many public sector workers are members of unions, (2) what the average annual union dues payment is per worker per year, and (3) what percentage of union dues are used by the unions for political activity.

Answering the first question is probably the easiest. According to the U.S. Census Bureau, in California in 2008 there were approximately 400,000 state government workers (ref. 2008 Public Employment Data, State) and approximately 1,450,000 local government workers (ref. 2008 Public Employment Data, Local). This means there are about 1.85 million state and local government workers in California.

To determine how many of these workers are unionized, there are at least two sources available, one is an authoritative study from around 2002 entitled “California Union Membership, A Turn of the Century Portrait,” which references data from the California Dept. of Industrial Relations, as well as data from the U.S. Census Bureau, and corroborates this data with a series of surveys administered to union locals throughout California. This study determined that, at that time, 53.8% of California’s public sector workers were unionized.

Another more recent source of information comes from UnionStats.com, an online database, updated annually, that tracks union membership and coverage, constructed by Barry Hirsch (Andrew Young School of Policy Studies, Georgia State University) and David Macpherson (Department of Economics, Trinity University). Using data from the U.S. Census Bureau and the Bureau of Labor Statistics, they have compiled a variety of interesting data, including “Union Membership, Coverage, Density, and Employment by State and Sector, 1983-2009.” By clicking on the 2009 link provided under this section on the left column of their home page, a spreadsheet comes up with a number consistent with the earlier 2003 findings, that is, 55.8% of California’s state and local government workers are now unionized. This means there are just over 1.0 million unionized state and local government workers in California. How much do they pay each year in dues?

According to a July 7th, 2010 guest editorial published in the San Jose Mercury entitled “Teachers’ unions political funding inappropriate,” authored by reform activist Larry Sand, “Teachers’ dues in California average about $1,000 per teacher per year, with about 30 percent of it going for political spending.”

What about police, firefighters, corrections officers, and other public safety personnel – virtually all of whom are now unionized in California – who comprise about 13% of the state and local government workforces – about 240,000 employees? How much do they pay annually in union dues? According to information provided by Vallejo, California’s post-bankruptcy City Manager, Joseph Tanner, and as reported by George Will in a Sept. 11th, 2008 Washington Post column entitled “Pension Time Bomb,” “using fiscal 2007 figures, each of the 100 firefighters paid $230 a month in union dues and each of the 140 police officers paid $254 a month, giving their unions enormous sums to purchase a compliant city council.” If this is typical, it would equate to at least $2,750 per year in union dues for police and firefighters in California. Even if the Vallejo situation is far from typical, it’s probably accurate to estimate California’s public safety workers pay their unions at least $1,000 per year in union dues.

Between teachers and public safety employees you have accounted for about 55% of California’s unionized public employees. Getting information on each of the unions may yield more startling total union revenues, but if you simply assume that public employees who are bureaucrats, nurses, administrators, maintenance employees, etc., are paying on average $500 each year in dues to their unions, then you can calculate the average payment for the entire 1.0 million unionized California state and local public employees is $750 per year. This is probably a conservative estimate, but using this number yields a total dues revenue to California’s public sector unions of $750 million per year. How much of this is used for political activity?

Returning to Larry Sand’s commentary, 30% of CTA funds are allegedly used for political activity. Most inside observers I’ve talked with suggest the percentage is higher than this, for a variety of reasons. If you review the California Fair Political Practices Commission website, don’t just look for data on election financing. Review the public disclosures by lobbying firms, and click on the pages that list their clients. Despite the unceasing uproar over the pernicious influence of “corporate lobbyists,” estimates of how much of the overall revenue to lobbying firms come from the public sector nearly always exceed 50%, and the source of this money is not just public sector unions, and their many political action committees and other organizations, but also from public agencies themselves! If one considers the level of power exercised by union operatives over public agencies – where the political appointees who supposedly manage these agencies come and go, but union power is a continuous reality – you can begin to imagine how the political agenda of taxpayer-funded public agencies and the public sector unions who influence these agencies are usually one and the same.

Another argument supporting the estimate that at least a third of union dues go to support political activity – if not much more – is the ability of the unions to reallocate money to political activity from their general fund when they choose. A recent example, reported on July 7th, 2010 in the Education Intelligence Agency blog post entitled “California Teachers Association Shifts $2 Million of Dues Money to PAC,” states the following:  “CTA very much wants Jerry Brown elected governor and Tom Torlakson as state superintendent of public instruction. So, for a single year, they increased the PAC allocation to $26.30 [per month, up from $18.30 per month], without raising total dues any additional amount. This maneuver will generate an additional $2 million or more for the PAC.” How this loophole works in California is also explained, “This sleight-of-hand would not be permitted at the federal level. But because state law allows the union to collect dues and PAC money in the same lump sum, CTA can claim that the general fund money is not the exact same money being added to the PAC coffers.”

There’s more. When assessing public sector union influence on politics, there are in-kind contributions that, while reportable, cannot be objectively quantified. What would it cost a private sector interest to send busloads of activists to events to demonstrate for the TV cameras, or use other assets such as existing office resources, in order to wage a political campaign? Whenever a public entity does this, they are required to register this as an “in-kind” donation, and assign a monetary value to this. But these in-kind values can be understated in the mandatory disclosures, and more significantly, these are contributions that are in addition to the hard costs that are funded through collection of union dues.

Finally, what about the indirect influence of public sector unions, the way they trade on the credibility of public servants – firefighters and police officers in particular – to advance their agenda in political campaigning? What about the influence of activist teachers in our public schools and universities, who advocate ideologies consistent with their union leadership when teaching impressionable young students, even when these ideologies may be counter to mainstream political sentiment?

Taking all this into account, the calculations that come out of this exercise are probably conservative – California’s 1.0 million unionized public sector employees times dues of $750 per year times one-third equals $255 million per year, over $20 million per month. This is what public sector unions are probably spending on politics, and for the many reasons detailed here, this number is probably quite low compared to reality.

The implications of this are clear: In California, public sector unions enjoy an overwhelming financial advantage in virtually every political cause or candidate they support. They have used this advantage to take over California’s State Senate and State Assembly, as well as many of California’s City Councils, County Boards of Supervisors, and various local administrative districts, especially in the major urban areas. In turn, this has resulted in years of relentless and unwarranted increases to public sector employee pay and benefits, to the point where public sector employees in California now easily enjoy pay and benefits that are, on average, at least twice what people earn on average in the private sector. Union control of California’s state and local governments has also resulted in a big-government agenda being successfully advanced for decades, meaning the number of government jobs and programs is swollen well beyond what might be optimal for California’s economy and private taxpayers.

If none of this seems compelling given the alleged power of California’s corporate interests, one may consider the following: (1) Corporations are reluctant to fight the unions – whenever corporate interests begin to support public sector union reform, the unions threaten retaliatory legislation and initiatives. To-date, corporations have consistently backed down in the face of these threats. (2) Many corporations don’t care if the state government is inefficient via unionization. In some respects, they actually welcome the tax burden and the increased regulations, because large corporations are better able to withstand the higher overhead, and better able to employ lobbyists to garner a share of the spoils in the form of subsidies or special exemptions. Their smaller emerging competitors, however, cannot withstand these impacts, and hence are undermined as competitors. To think California’s public sector unions provide “balance” to corporate interests is naive.

Anyone who thinks it will be easy to rescue California from the grip of public sector unions is encouraged to go out and raise campaign donations from people and organizations who don’t have to give you a dime if they don’t want to. Then compare this to the $20 million per month that perpetually flows into the political coffers of public sector unions through automatic withholding of union member dues. And never forget, as a taxpayer, this is your money they have used to take control and bankrupt our state.

Avoiding Global Deflation

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There’s a relatively recent analysis entitled “The Deflationary Impact of the Coming U.S. Commercial Real Estate Bust,” by Sean Daly, posted May 27, 2010 on Seeking Alpha, that reminds us the commercial real estate bubble hasn’t gone anywhere. And if you count the vacant windows in the strip malls, it isn’t hard to see the reality. Daly goes further, and in nearly 3,000 words of commentary, quotes, captions and attributions, and over a dozen charts, explains that commercial real estate loans generally have five year maturities, and the ones negotiated during the bubble boom are coming due starting in 2011. Daly also observes that the ultimate victims this time will be the 8,000+ community banks, not the big banks and Wall St. firms. Among Daly’s conclusions as to the deflationary impact of all this is this decidedly non-trivial gem: “this vicious cycle [widespread insolvency of community banks] starts to hurt the local economies just as the municipal bond defaults start to occur…worse case, the real estate industry in China goes bad and the two downturns hit the global economy at the same time.”

As noted on a June 8th post entitled “The China Bubble,” using data from USA Today, MoneyLife, 60 Minutes, China Expat, and others, real estate values in China have appreciated at 3 to 5 times their rate of GDP growth for a decade, commercial vacancy rates may already be as high as 50%. and the construction industry could comprise over 50% of China’s GDP. What happened to the U.S. residential real estate market, and is about to happen to the U.S. commercial real estate market, is also happening in China.

There are plenty of deflationary pressures on the global economy today, as enumerated on April 4th in a post entitled “Pension Funding Rates of Return:” (1) trillion dollar pension funds can’t appreciate faster than the rate of general global economic growth, which over the past 60 years has averaged about 3.0% per year, (2) public equities over the past 85 years have appreciated at a real annual rate of 2.8% per year, (3) central banks are already flooding the world with currency to stave off deflation, (4) money market funds are only returning 1.0% per year, (5) the stock market has been flat for the last ten years, (6) household and consumer debt are still at unsustainable levels and nobody is buying anything, (7) banks are holding foreclosed residential real estate assets to avoid further drops in asset values, (8) the commercial real estate market is hanging by a thread, (9) the bond bubble is about to pop, (10) we can’t extract abundant reserves of natural resources because environmentalists have successfully legislated or litigated development to a standstill, (11) the business community has given up and has decided the government is their new customer, and (12) public sector unions have taken over our state and local governments in California – demanding wages and benefits that are bankrupting us – and they are successfully exporting that model to other states and to Washington DC, guaranteeing the tax burden on job creating businesses will go up, not down.

Also creating a deflationary economic impetus is the relentless aging of humanity. As the percentage of retirees increases, the percentage of total consumption that must be supported through the financial return on passive investments increases. Technology-driven, ongoing increases in productivity makes supporting higher percentages of retirees economically feasible, but to avoid macroscopic speculative distortions to the economy induced by gigantic pension funds desperate to maintain their solvency when sustainable returns are no longer adequate, it may be that retirees need to be primarily supported through contributions from current workers. As it is, the aging populations of Japan, Europe and the United States face deflationary pressure because the more pensioners and bondholders we’ve got, the more claims on economic output are held by nonproductive members of society. Their savings, concentrated in pension funds and bonds, are chasing a diminishing percentage of productive assets, making these assets explode in value. When the collateral collapses, the loans go into default, the banks go bankrupt, and economic activity implodes.

To end a deflationary spiral, new investment needs to create new asset classes at a faster rate than over-valued assets correct downwards. To make this happen, government policy needs to adhere to two basic principles: First, remove the uncertainty that hangs over the private sector by backing off aggressive new legislation, and simplify and clarify existing legislation. The thousands of pages of new legislation that are as transformative as they are labyrinthine, enacted with the barest of mandates, written by interns, proofed by lobbyists, and rammed through Congress using unprecedented tactics, is not making businesses want to expand into new territory. Businesses bear the consequences of new laws more than the lawmakers do, and need to thoroughly understand what these new laws will cost and how they will comply. It is a heavy burden to lay onto business at the same time as the economy is slowing. An additional source of uncertainty facing business are the scheduled expiration of the Bush tax cuts. It is difficult to see how imposing additional taxes on the economy is going to be stimulative (ref. Art Laffer’s June 6th commentary “Tax Hikes and the 2011 Economic Collapse“).

The second way government policy can help to avoid a deflationary spiral is to invest deficit spending into projects that will yield a long-term return on investment. As argued in “Sustainable Economic Returns,” if deficit spending is indeed our economic elixir, we should be engaging in responsible development of domestic fossil fuel reserves and building nuclear power plants. We should be constructing desalination plants, canals and reservoirs (above and below ground), and we should be building and upgrading our bridges and freeways. Government should also be funding more strategic military spending, space exploration and development, and other ultra-high tech initiatives. All of these projects could be public-private partnerships, and could rely on deficit spending. But along with the temporary economic stimulus they would bestow, they would provide sustainable economic returns in the form of effective military deterrence, ongoing technological leadership, and assets of infrastructure that would yield permanently cheaper energy, water and transportation. Instead, government is channeling trillions of dollars into pension funds and public sector jobs. The economic goal of stimulative deficit spending should be to make basic resources cheaper through infrastructure upgrades and high-tech innovation, not to pour borrowed money into Wall Street’s public employee pension funds while relentlessly expanding the government employee payroll.

If consumers are spending less for basic resources, which will improve their personal cash flow, and if businesses are able to operate in a regulatory environment that is reasonable and fairly predictable, then the preconditions are met to create new asset classes whose growth may offset the shrinkage of the bubble assets. Meeting these preconditions will mean individuals and investors will be able to afford completely new products, enabling growth of new industries limited only by ones imagination – genetic therapies, cars with full auto-pilot, android care-givers, a revolution in education, even better communications, space tourism.

If deflation is the trend we’re to avoid, it is essential to stimulate the economy. But this stimulus must be implemented via policies that yield long-term appreciation to our national assets, our infrastructure, and our competitiveness, affording us the wealth to develop entire new industries and services for an aging, technologically empowered, increasingly enlightened civilization.

Fighting Union Power

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If you have concluded, like I have, that 21st century labor unions in America nearly always create more harm than good, and if you have concluded, like I have, that the fight against union power is increasingly tilted in favor of the unions, it is easy to become overwhelmed. After all, the primary focus of CIV FI is to explore ways to restore financial sustainability to public institutions, and more generally, to our economic life in the wake of the debt bubble. Why is more and more of our content focused on the rise of unions?

It isn’t as though unions never had a place in our national dialogue, or a role in the fight to implement humane work rules, workplace safety, and better wages. But even as many of my liberal friends often proclaim, the role once relegated to unions now belongs under the government – and the role of government in this regard should be to create uniform basic minimums that employers must adhere to, not become unionized itself, and create laws and regulations that favor unionized employees to the detriment of everyone else.

There are so many facets to the abuse, corruption, wealth-destruction, economic decline, loss of freedoms, undermining of democracy, extortion and outright theft that comes with unions today, that volumes could be written about the problem. Public sector unions have hijacked our public employee workforces, taken away their incentives to excel, bribed them with over-market wages and ridiculously over-market benefits, introduced massive inefficiencies to government operations, ruined our system of public education, bankrupt our government entities in the process, bought our elections, control our politicians, and now they are using the power they’ve achieved in government to go back out and recapture the private sector.

If you don’t believe any of this, and especially if you do believe all of this, you may wish to refer to the following information sources to further understand just how far union power now extends, and also to learn how to join the fight to stop them before it’s too late. This list includes resources focused on California – because if we can stop them here we have a real chance to stop them in the rest of the nation:

Public Sector Union Reform – Online Resources

Citizens Power Campaign – a political action committee working to reform California’s public sector unions through the initiative process, and their sister site for community building, Unplug The Political Machine.

Pension Tsunami – daily links to news reports nationwide on public sector unions and the pension crisis (sign up for daily text email).

Cal Watchdog – good source of public employee union activity and government waste in general. Read “Plunder – How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation” by Cal Watchdog Editor Steven Greenhut.

Devil At My Doorstep’s Blog – updates on union activity nationwide. Read “The Devil At My Doorstep,” by Devil At My Doorstep Blog Editor Dave Bego.

National Right to Work Committee – combats compulsory unionization nationwide.

Public Service Research Council – information and updates to fight union control of government.

Center for Union Facts – information about the political activities of unions and cases of union corruption.

Free Enterprise Nation – fights redistribution from taxpayers to government employees and their allies.

National Institute on Money in State Politics – tracks election spending by state and by interest group.

California Fair Political Practices Commission – database of political expenditures and  donations.

What defenders of unions frequently assert is that unions are necessary in order to help guarantee a “living wage” to workers. While this sounds reasonable, it has been taken to extremes. For example, in California’s public sector, unionized state and local workers average $60K in wages and $40K in benefits per year, while private sector workers average $40K in wages and $10K in benefits per year. And even $100K per year isn’t enough to live a middle-class lifestyle – because in order to pay the over-market wages to unionized public sector employees, higher taxes and hidden taxes have inflated the prices for housing, utilities and consumer goods. The irony is deep. Public employees could afford to make less, if they made less! Instead they are barely breaking even, impoverishing the rest of us, and destroying the free-market economy that tax revenue depends on.

As goes California, so goes the nation.

The Axis of Wall Street & Unions

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One of the greatest misconceptions on the left may be the suggestion that “us” refers to workers (hopefully unionized workers), along with government programs and regulations, and “them” refers to big business, their friends on Wall Street, and their puppets in government. At the risk of merely presenting an opposing paradigm that is equally over-simplified, here are some alternative scenarios. The open-minded reader may find them instructive.

For over a decade, Wall Street has enjoyed an incestuous and exploitative relationship with public sector unions, because public employee pension funds have poured more new money into their equities markets than any other single source. This isn’t leveraged money or trading turnover, either, this is new money, cold hard cash that is transferred from the pockets of taxpayers into government payroll departments and turned over to the pension funds. In the United States each year, the pension fund contributions of 25 million government workers – at $10,000 per year each, which is probably a very conservative estimate – pour over 250 billion dollars into Wall Street.

The way Wall Street seduced public sector unions into thinking they could ask for retirement benefits that, on average, are quadruple what the average private sector worker can expect from social security is the single biggest example of how Wall Street seduced the entire nation into believing they could enjoy a quality of life far in excess of what they actually were earning. Public sector union leadership can hardly be blamed for believing that their trillion dollar pension funds could earn 8.0% per year, forever, during an era when debt in general was exploding, asset bubbles were inflating relentlessly, and collateral-generated cash was inundating the economy. But now the party is over, and while the Wall Street barons smoke the proverbial cigarette and consolidate their winnings, public sector union officials are still doing their dirty work – intimidating politicians into raising taxes to continue feeding money into Wall Street pension funds that cannot hope to achieve 8.0% annual returns.

Who else has a vested interest in suggesting an 8.0% annual rate of return is feasible forever, with trillion dollar investment funds, other than Wall Street and Public Sector Unions? At least in the case of Public Sector Unions, their leadership believed this nonsense, and now find themselves backed into a corner. During the real-estate bubble boom, Wall Street suckered everyone, by lobbying for the left-wing policies of lending money to people who couldn’t afford to borrow the money, which built the financial house of cards, and by lobbying for the right-wing policies of deregulating investment banks, so they could collateralize the mortgage-debt house of cards into 50 trillion dollars of phony money. And when the whole ridiculous scam collapsed, Wall Street took all the money off the table, collected bail-out money, and turned the United States into a debtor’s prison.

The choice of the term “axis” to describe how public sector unions are the unwitting partners of Wall Street is not accidental. Because as the historical use of the term “axis” suggests, these alliances are pragmatic partnerships of entities who have become corrupt and grandiose, and are doomed to tragic dissolution. The only question is what equivalent of wars and poverty will we now have to endure as we struggle to reform Wall Street and roll back the delusional and unsustainable level of entitlements currently expected by Public Sector Unions. Here are some factors to consider as we hopefully move towards an economy based again on realistic and sustainable financial principles:

1 – “Big Business” has been just as victimized and suckered by a poorly regulated Wall Street as the public sector unions. Unlike these unions, however, big business didn’t collude with Wall Street to impose trillions of dollars of liability onto taxpayers in order to fund unsustainable and inequitably generous public sector employee compensation packages.

2 – The industrial products of corporate America, i.e. “Big Business,” create wealth. The financial products of Wall Street – properly regulated and at an appropriate scale – can assist in capital formation, liquidity, and economic growth, but that scale has been exceeded by at least an order of magnitude. At their current scale, Wall Street financial products are simply engines to expropriate massive amounts of wealth from the economy, producing nothing in return.

3 – Passive investments such as the giant, trillion dollar public employee pension funds, will not see returns of 8.0% (inflation-adjusted 5.0%) again for a generation. There is too much money out there chasing too few genuine investments. You can’t saturate an economy with near-zero interest rate credit, then expect trillion dollar investment funds to perform at high single digit rates of return. The spread is too big.

4 – Local public governments who issue bonds at tax-free rates of return of 5.0% or more to finance investments in their pension funds where they expect to generate rates of return that exceed 5.0% (notwithstanding the tax-free subsidy that is a further economic drain) are delusional. This practice of issuing “pension obligation bonds” is based on assumptions that are false. Pension obligation bonds will hasten a local public entity’s descent into bankruptcy, not alleviate it.

5 – Public sector bond holders and public sector pensioners represent the same phenomenon – non-productive members of society (passive investors and retirees) who have placed demands on the economy that can no longer be fulfilled. The level of bond interest rates is too high, the level of public sector pension benefits is too high, the amount of money tied up in these obligations is too high a percentage of our national wealth, and as a result, both of these groups are destined to see their returns and their benefits reduced – and the sooner this happens, the less severe the resulting economic hardship will be to the nation.

6 – There is NO comparison whatsoever between the “crisis” facing Social Security and the catastrophe facing public sector pensions. As argued in “Funding Social Security vs. Public Sector Pensions,” the U.S. is on track, within a generation, to be paying as much in absolute dollars to public sector retirees each year as they will be paying to social security recipients, despite the fact that social security recipients will be four times as numerous. Social security can be fixed with moderate adjustments: slightly lower benefits, slightly higher retirement ages, slightly higher withholding, and a slightly higher cap on wages before withholding ceases. Only the Wall Street / Public Sector Union axis has a vested interest in equating the moderate financial challenges facing social security with the totally insolvent public employee pensions.

7 – The solution to restore solvency to taxpayer-funded retiree benefit plans is to move to a pay-as-you-go system, where current workers support retired workers, not rely on passive investment returns. As noted in #6, this will be easy to achieve with respect to social security, but it is impossible to achieve with respect to public sector pension funds unless the benefits are dramatically reduced. And why shouldn’t they be? Public sector employees already make more in current wages and benefits – why shouldn’t they just receive social security like the taxpayers who support them? And why should the government invest taxpayer’s money into the equities market with public employees holding all the upside, and taxpayers holding all the downside?

In order to move back to a financially sustainable economy, the United States has a unique window of opportunity to reform Wall Street and reduce the benefits enjoyed by unionized public sector employees. This is because, as argued in “The China Bubble,” the United States still enjoys crucial advantages vs. the rest of the world’s national economies, a fact that grants us another decade or so to make some hard decisions and get back on track. But the beginning of that process depends on voters realizing that “big business” and Wall Street are not in collusion, they are in opposition. Big business creates products and wealth, and Wall Street, along with their henchmen in our unionized government entities – at least in their currently grotesquely overgrown versions – expropriate wealth and create nothing.