Nonpartisan Public Sector Union Reformers

To declare that union reform, public sector union reform in particular, is a nonpartisan cause, is certain to attract vociferous challenges from defenders of unions, but events continue to trump ideology.

As documented in an earlier post “The Democratic Party War,” even in California, a state where public sector unions wield nearly absolute control, there are increasing numbers of prominent democrats who are standing up to the unions. They include Los Angeles Mayor Antonio Villaraigosa, former State Senator Gloria Romero, President of the California NAACP Alice Huffman, San Francisco Public Defender Jeff Adachi, former Assembly Speaker Willie Brown, and Matt Gonzalez, former President of the San Francisco Board of Supervisors. From education reform to pension rollbacks, Democrats are lining up to make hard choices in California, staring down union power in the process.

A series of similar reality checks are happening all over the United States, as Democrats realize the agenda of public sector unions is often in direct conflict with their ability to fund government programs and infrastructure projects. As reported in the New York Times earlier this week in an article entitled “Cuomo Secures Big Givebacks in Union Deal,” a democratic governor in a union stronghold is making tough decisions in an attempt to restore budget solvency. As reported on June 21st on the website “Intercepts,” in a post entitled “Rage Against the Machine,” Democratic lawmakers in New Jersey have joined with Republican Governor Christie to require public employees to contribute more to their own pensions and health care premiums, and Rahm Emanuel, the newly elected Democratic Mayor of Chicago, has canceled cost of living increases for the public school teachers in that city. None of this sits well with public sector unions. And none of this would be happening without Democratic lawmakers.

Another nonpartisan phenomenon gathering momentum is the willingness of major news organizations to editorialize in favor of public sector union reform. In California, the Los Angeles Times, of all newspapers, just published an editorial entitled “‘Card check’ empowers unions, not union workers,” in reference to a bill recently passed by the California legislature. And in California’s capitol city, the liberal Sacramento Bee recently editorialized that “Union concessions are city’s only hope,” referring to the fact that the city of Sacramento cannot hope to balance its budget without reducing the over-market pay and benefits afforded their public workforce.

As documented in our post “Is Union Reform Partisan,” fully 95% of political contributions by unions over the past 10 years in America have gone to democratic lawmakers. But increasingly, democratic lawmakers are realizing they must stand up to the union agenda. This is testimony to the fact that public sector unions have clearly overreached, and that politicians of both parties now realize this. That even democrats, who stand to lose their primary source of funding, are beginning to enact public sector union reform, is a most hopeful sign.

Why Pensions Are Grossly Underfunded

The San Diego Union Tribune ran a report on June 17th entitled “Escondido firefighters do contribute to pensions.” Apparently this report was to correct an error from a previous article in which the Tribune stated that Escondido’s firefighters did not make any contribution to their pension. In reality the firefighters contribute to their pension fund an amount, in the form of payroll withholding, equivalent to 9% of their salary.

While it is commendable that Escondido’s firefighters do pay something towards their pensions, considering how many safety employees in California still pay nothing, it is important to place this 9% contribution within the perspective of how much it really costs to fund a “3 at 50″ pension.

The following table depicts how much, in terms of percent of salary, an employee will need to have contributed into their pension fund in order to maintain solvency based on various rates of return for the fund.

This table uses after inflation numbers, which makes the returns appear small. In reality, CalPERS, CalSTRS, and most other pension funds, project a long-term rate of inflation of 3.0%. This means that the nearly best case scenarios here, 7.5% before inflation (showing as 4.5% after inflation on the table), are representative of the current official long-term projections used by most pension funds. Based on the official rates of projected returns for pension fund investments, a 30 year veteran, retiring on a “3.0% at 50″ pension, will collect 90% of their salary in retirement, and they will need to contribute 32.5% of their pay into their pension fund every year they work. On that basis, 9% is less than one-third what will be necessary to fund their retirement pension. But what if the pension funds return less than 4.5% (7.5% before inflation) per year?

As can be seen, for every 1.0% the real rate of return drops, the required contribution increases by over 10%. That is, if CalPERS can only deliver a 6.5% return (3.5% after inflation), the contribution goes up from 32.5% of salary to 43.4% of salary. If CalPERS rate of return goes down to a 5.5% return (2.5% after inflation), the contribution goes up from 32.5% of salary to 57.9% of salary.

Nobody seriously questions the fact that police and firefighters deserve to be paid a premium for the work they do. But how much of a premium is appropriate? A self-employed independent contractor has to pay the employer and employee share of social security. That means they have to pay 12.5% of every dime they make into the social security fund. And if they are fortunate enough to earn, at the end of their careers, what the average veteran police officer or firefighter makes – let’s lowball that at $100K – they will get a social security benefit, at most, of $30K per year at age 68. This equates to a pension formula of roughly “0.75% at 68″ vs. “3.0% at 50.”

Public sector workers, all of them, should consider these apples-to-apples comparisons to the taxpayers in the private sector who support them, when they suggest that 9% is an appropriate or commendable amount for them to be contributing to their pension funds. They should be prepared to explain why they aren’t contributing at least 50% of the cost for their pensions, with that contribution going up whenever projected rates of return for their pension funds go down.

California Legislature Aims to Kill Initiative Process

California’s legislature is moving a bill forward that will throttle back the ability to place citizen initiatives on the statewide ballot. As noted in Ballot Access News on May 10th in a post entitled “California Democratic Legislators Advance Bills Injuring Ballot Access for New Parties, Initiatives,” the bill is nearing passage by both houses of California’s legislature:

“On May 9, the California Senate passed SB 168, which makes it illegal to pay circulators on a per-signature basis, if they are working on initiative, referendum, or recall petitions. On the same day, the Senate passed SB 448, which forces circulators of those kind of petitions to wear a button that tells whether they are paid or volunteer. These bills also passed on party line votes, with all Democrats voting “yes” and all Republicans voting ‘no.'”

The impact of this legislation, which is expected to pass the Assembly and get signed by California Governor Brown, will be to double (or even triple) the price of successfully placing a citizen initiative onto California’s state ballot. Anyone who has tried to raise money to qualify a state ballot initiative knows what an advantage the powerful special interests have in this high-stakes political niche, whether they are public employee unions or large corporate interests. Only grassroots organizations with limited access to funding, from taxpayer groups to progressive organizations, are negatively impacted by this legislation.

From Citizens In Charge, a website dedicated to protecting the initiative process across the U.S., here’s more on how SB 168 is going to undermine the ability of Californians to do anything about their out-of-control, over-paid government worker unions who are systematically consolidating their absolute domination of California’s state and local governments:

Citizens in Charge Opposes California Senate Bill 168, March 15, 2011 – “SB 168 bans ballot committees and individuals from paying people who circulate petitions for initiatives, referendums and recalls on the basis of the number of signatures they collect. It would mean that a person who paid his daughter $100 if she’d work until she gathered 100 signatures could spend a year in jail, and his daughter up to six months. Campaign committee members of a group that awarded a free dinner at a local restaurant for the volunteer who collected the most signatures that day could likewise be arrested and incarcerated or fined. There are several important reasons to reject SB 168. The legislation will drive up the cost of petitioning a measure onto California’s ballot. Because paying petition circulators by the signature gives them an incentive to work harder, it is the most cost effective means available.”

SB 168 is not the only way that powerful public employee unions are moving to protect their power and preserve the overmarket pay and benefits they have “negotiated” with the politicians they elect. Another bill moving through California’s state legislature will restrict the ability of local governments in California from declaring bankruptcy (ref. AB 506 text), which is virtually the only way they can get out from under literally tyrannical collective bargaining agreements.

The idea that SB 168, which will preserve the ability of corporations and unions, who will still have ample financial resources to file initiatives, but will edge out of the field grassroots organizations, should put completely to rest the idea that these unions represent “working people,” or are trying to “save the middle class.” They are America’s version of Soviet Russia’s nomenklatura, a bureaucratic elite that enjoys special privileges. Through their pension funds which confiscate the earnings of private sector taxpayers for the benefit of government workers, these public employee unions are accomplices of Wall Street, and they are in collusion with the very largest corporations to eliminate competition.

The agenda of the leadership of public employee unions, whether or not they admit it even to themselves, is to create a nation where they have empowered the corporate monopolies, the super-rich, and their growing ranks of government worker protectors, while maintaining a precarious symbiosis with a similarly multiplying but impoverished, minimally productive class of citizens who who pay zero (or negative) taxes and have been rendered utterly dependent on government entitlements. Those who remain, outnumbered, outspent, and outvoted, nonetheless drive the economy and improve our lives through their job-creating entrepreneurship, disruptive innovation, perilous risk-taking, and unrelenting hard work. Yet they are left to be tainted and taxed into oblivion, because they are the evil “capitalists.”

Preserving America’s Retirement Security

An interesting analysis was published last week on Reason.com by Emily Ekins entitled “Differences on Social Security Reform.” In her article, Ekins presented data from a poll that asked whether or not the respondent would support or oppose reducing Social Security taxes and allow individuals to invest in their own retirement instead.

The results were stratified by age, education, income, ethnicity, gender, political ideology, party affiliation and union membership. Some of the results were predictable and showed strong polarization – the older the respondent was, for example, the more likely they were to favor preserving social security as it is, and the younger the respondent was, the more likely they were to favor reducing social security taxes and benefits. Another obvious result from the survey was the split between progressives and libertarians, where the mirror image expressed by their sentiments – progressives 58% vs. 35% opposed, libertarians 57% vs. 31% in favor – bordered on parody.

Crucially, Hispanic voters, rising demographically in the U.S., were opposed 52% vs. 38%; African Americans also opposed lowering social security taxes and benefits, 59% vs. 32%. One needn’t read too much into that, while Hispanics may be destined to become the decisive swing vote in elections of the future, if not already, their political sentiments may change. But reality is about to trump the political debate between those who believe in the ownership society and those who believe in the great society.

The most glaring example of “ownership society” ideology in practice, ironically, is that of the government employee pension funds, and their union apologists. They not only believe, like many libertarians, that investment returns can yield a lifestyle in retirement far, far greater, per input, than one fueled merely through transfer payments from taxpayers, but they have put it into practice. Unlike libertarians, of course, the government employees expect taxpayers to cover the difference when their collectively invested inputs fail to yield the lifestyle in retirement they’ve defined for themselves.

The problem with all this “ownership,” however, rests on two twin phenomena that will derail extravagant, investment return fueled retirements whether they are those of collectively invested public employee pension funds, or individually invested 401K accounts. They are the reality of the American (and global) economy’s debt hangover that has just begun, which is going to cause real returns on invested funds to drop precipitously, combined with the reality of an aging population both inside and outside the public sector. The private sector worker-to-retiree ratio in America will drop from roughly 3-to-1 today to 2-to-1 within the next 20 years; the public sector worker-to-retiree ratio is on track to move from today’s 2-to-1 to nearly 1-to-1 within the next 20 years (based on their lower retirement ages).

The basis for these worker-to-retiree ratios, as well as calculations that estimate how much taxpayers will pay, and retirees will receive, under various realistic assumptions, are explored in depth in the posts “The Cost of Government Pensions” and “Funding Social Security vs. Public Sector Pensions,” but here’s a summary:

On a pay-as-you go basis, if a retiree receives a defined benefit equal to 2/3rds of their average career salary, and there is one worker for each retiree, then each worker must set aside 2/3rds of their paycheck to fund their retirement. This is a roughly accurate presentation of what the public sector faces. On the same basis, if a retiree receives a defined benefit equal to 1/3rd of their average career salary, and there are two workers for each retiree, then each worker must set aside 1/6th of their paycheck to fund their retirement. This is a roughly accurate presentation of what social security faces.

As calculated in the post “The Cost of Government Pensions,” because public sector workers, on average, make 50% more in base salary than private sector workers, the projected amount of retirement payments for the 20% of the working population who are government employees will actually exceed the projected amount of social security payments to the entire remaining 80% of America’s workers (to calculate this, you have to also take into account the fact that government workers, because they retire earlier, comprise 30% of all retirees even though they are roughly 20% of all workers, i.e., if “S” represents salary, [(S + .5S) x .66 x .30] > [S x .33 x .70]). And the government worker unions who cling to the fiction that these levels of benefits are sustainable suggest that this disparity doesn’t matter, because investment returns will obviate the need for pay-as-you go funding. Those libertarians who actually think that an “ownership” society, where social security is scrapped and everyone invests, will enable everyone to enjoy this level of retirement benefits, are even more delusional. Government employee pension funds that cover 20% of the workforce are already the biggest players in the investment market – they must beat the market to deliver the returns they claim they can deliver for decades on end. Libertarians apparently think that 401Ks invested by 100% of the workforce can beat the market too. You can’t beat the market when you are the market.

This is perhaps the prevailing financial question of our time: What real rate of return can be siphoned out of retirement accounts to augment taxpayer generated pay-as-you go retirement funding, when there are only two workers for every retiree, and 100% of retirees depend on these investment returns? Put another way, if retirees who number 1/3 of the entire population are pulling money out of invested funds, can those funds, in aggregate, even match the rate of general economic growth, much less exceed it?

Seen in this context, it may be that ideology and wishful thinking will be trumped by economic and demographic reality. Public sector pensions and 401Ks alike may not be able to perform to expectations when more people are retiring than ever, and economic growth itself is constrained because growth is no longer catalyzed by debt accumulation. In this environment, social security, which already (notwithstanding a most irresponsible temporary lowering of the rate of employee withholding) claims through the employee and employer a combined 12.5% of payroll, is revealed as pretty much sustainable. At a rate of withholding increased to 1/6th of pay, or 16.7%, social security benefits will be solvent forever. If that rate of withholding, from 12.5% to 16.7% is unpopular with voters, than means-testing, raising of the retirement age, raising of the absolute ceiling on withholding, or reduction of benefits can make up the difference. But the adjustments necessary to preserve social security, which is a defined benefit, are incremental.

On the other hand, when pension funds acknowledge that their projected rates of return cannot be achieved (the idea they can earn 7.75% per year when the Fed borrows money at less than 1.0% per year is absurd), they will be revealed to be completely insolvent (for more on this read the posts “How Rates of Return Affect Pension Contribution Rates,” and “How Rates of Return Affect Required Pension Assets“). On a pay-as-you go basis, public employee pensions would have to contribute 66% of base pay from current workers to support retirees. On an aggregate basis, the funds necessary to pay retired public employees, who represent less than 20% of the workforce, will actually exceed the funds necessary to pay social security benefits to everyone else, representing more than 80% of the workforce.

The good news here is that as investment returns are revealed, through economic and demographic reality, to be far from adequate means to sustain America’s retired population, taxpayer funded defined benefits will be the only choice left. This, in-turn, in order to be sustainable and equitable, will mean that while public employees will continue to receive defined benefits, and while for many strata of the public sector workforce these defined benefits may still exceed what social security would pay, overall their benefits will have to be greatly reduced. Taxpayers cannot be expected to contribute 16.7% of their payroll to keep social security solvent in the future, yet at the same time also pay taxes that would amount to another 16.7% of their payroll simply to keep public sector pensions (as they are currently formulated) solvent as well.

The solution to providing for retirement security in America is to retain defined retirement benefits for everyone, providing all workers a defined benefit in the form of social security, with premiums granted in some cases to government workers who endure risks in their professions. This will require a modest increase in the rate of social security withholding, from 12.5% to 16.7%. If the social security trust fund and all public sector pension funds were then invested in short-term T-bills, it would both hedge these funds against inflation, eliminate their volatility, and provide a market for federal debt. It would also remove speculative taxpayer-funded Wall Street gamblers from the market – public sector pension funds who pursue risky investment strategies, motivated by a need to deliver over-market returns.

Rationalizing the taxpayer-funded elements of retirement security in the ways just described would also return the market to individual investors. Eliminating taxpayer funded, aggressively managed, trillion dollar pension funds, whose sophisticated machinations extract over-market returns, would allow privately managed funds and individuals to again receive market-rate returns on their investments without having to engage in inordinate risk. Breaking the tyranny of Wall Street pension funds, and their last, biggest suckers, the government worker union leadership who – again quite ironically – believe these trillion dollar pension funds can beat the market forever, will provide Americans the best of both worlds. They will all have secure, sustainable defined retirement benefits, and they will have a market for their supplemental 401Ks that again delivers a decent return to small investors.