Guest Blogger: The Public Pension Blues

It has been taken as an article of faith for the past two or three decades that our public institutions are irreparably broken. Beginning with the inauguration of Ronald Reagan in 1981, both of our major political parties have worked tirelessly, it seems, to accelerate deregulation and privatization of many public goods and services, often without full regard for the consequences. By the time Bill Clinton declared that “the era of big government is over” in 1996, conventional wisdom had hardened around the idea that private is better than public every time, and that deregulation would inevitably deliver a higher standard of living, and more efficient social services, for everyone.

Needless to say the jury is still out on that one. This past year bore witness to the consequences of this approach to governing as many voters fed up with slow wage growth and limited options in an economy that they were told had fully recovered from the Great Recession chose to turn their backs on the political establishment by electing the ultimate outsider as president, a TV personality with no experience whatsoever in government.

One casualty of the war on public services is pensions. I know, I know—there are more than a few public employees out there we’d love to put out to pasture, sooner rather than later. That’s what makes this such a sexy topic: without any decent incentive to retire, some old teachers are like old ballplayers. First, they move from behind the plate to the outfield because their offensive skills are good but their defensive skills are lacking. Then they move from the outfield to first base because their deteriorating defensive prowess has become too much of a liability to the team. Then they move from first base to the bench, where they can function reasonably well, the American League at least, as designated hitters—because when your main competition for a spot in the batting order is a pitcher, the bar is set pretty low. Sometimes it’s easier to trade on past glory than on current productivity.

But I digress. My point is that a good retirement incentive is good for everybody. It’s good for some veteran employees who may find their best days in the rearview mirror to get on while the getting’s good, and it’s good for younger workers trying to secure a place in a profession. I mean, would you rather watch an aging Jose Canseco flail at fastballs or watch the next Mike Trout get his chance? I know which one I’d prefer.

It may be this kind of thinking, in fact, that encouraged legislators in Pennsylvania, where I live, to increase benefits for public retirees back in the early 2000s, when times were good. It actually might have made some economic sense, too: if times were good—and let’s remember here that they were pretty good, and no one, I mean no one, not anyone, could have foreseen that any kind of bubble might burst at the time—then increasing benefits might have seemed like a great idea. After all, there were new technologies being employed in every sector that seemed to herald an era of stable growth and prosperity. In that kind of environment, it might have made sense to encourage more teachers and other public employees to retire and make way for new workers eager to take their place, and to give those outgoing employees a retirement benefit that would serve their needs in case the growth continued. It can be easy to forget that defined benefits can cut both ways.

Alas, it was not meant to be. We all know the story: the market crashed, people had their savings wiped out as real estate values tanked, and a new era of cynicism, anger, bitterness, and uncertainty set in. It didn’t help that Congress offered up $700 billion to prop up the banking system (although it should be noted that the next Congress also offered a huge stimulus that helped many everyday people, even if it was pilloried as a waste of money by free market ideologues terrified that government spending would only make things worse). The federal government may have favored stimulus but in the states the reaction was the opposite: everything was reined in. Some public schools, for example, still have not recovered. And then that same Congress faced an electoral bloodbath in 2010 from which it could be argued the country, and economic policy, have still not recovered.

But I’m digressing again. Here’s my second point: it’s easy to dismiss the decision by state lawmakers here in Pennsylvania to increase benefits for retirees as just another example of bad decision-making spurred by pressure being put on legislators by special interest groups like the much-reviled teachers unions. But there may be other explanations. In fact, our willingness to lean on this one explanation suggests that something is, in fact, very broken in our democracy. We’ve become so cynical that the only way we can process a decision that has far-reaching negative consequences is to attribute it to bad behavior. There’s good reason for that, I guess—you know what I mean if the words “Iraq,” “Watergate,” and “Lewinsky” mean anything to you—but at some point we have to be more circumspect on our analysis of how the political system works if we actually want it to work.

This is at the heart of discussions I’ve been having about pensions and about the best way to compensate teachers and other public employees at the end of a long career. Some facts are indisputable. First, and most obviously, the crisis we are facing is a huge one, and there is no easy way out. Pennsylvania is not the only state dealing with this problem, but the mountain it has to climb is as steep as any. It’s also true that most teachers do not receive full benefits from their retirement plans because they leave the profession early—that much is obvious—and it’s true that making benefits more “portable” makes a lot of sense.

But this is also where I part ways with others. They seem to believe that the solution to the problem is to convert all of our public pension plans into private retirement accounts, which is a perfectly conventional thing to think these days. The idea here is one we’re all familiar with: instead of offering a defined-benefit plan, these folks would have public employees converted to defined contribution plans. But here’s the catch: in a defined contribution plan, the contributions may be defined but the benefits are not. Contributions are invested, and the payout depends on how well those investments do. Yes, it’s true that these are mostly considered “safe” investments, investments in things like mutual funds or bonds. But they are investments nonetheless, and there is risk involved.

What kind of risk, you might ask? Well, ask anyone who served in Pennsylvania’s General Assembly back in the early 2000s. You might be surprised to know that many state pension funds are also invested: the state takes the contributions of future beneficiaries and its own contributions and invests them as well. The money doesn’t just sit around collecting dust. So if the market fails to perform someone has to make up the shortfall. The difference, of course, is that states are required by law to protect the investments employees have made. They’ve made a promise by defining the benefits employees will receive when they retire. The crime Pennsylvania committed was not increasing benefits; it was failing to feed the kitty when its investments were eviscerated by the market crash.

Of course in today’s uncertain economic climate that promise is really hard to keep. It’s even harder to keep because public opinion has increasingly coalesced around the idea that defined benefit plans cannot work. More than a few well-intentioned critics of government ineptitude seem to have bought it too. Sometimes I wonder if I shouldn’t. It all sounds so compelling. If only we could find some examples of places where pension plans are actually working…

Oh, wait; here’s some evidence. If you follow the link you can see that some states and localities actually have very healthy pension funds. In fact, much of the bad press given to failing or overly generous pension plans in some states can be attributed to what one author calls “pension envy.” Some of it may link back to the great and suggestive name of Missouri’s plan (“LAGERS”), a name anyone could envy, but much of it probably stems from the fact that 401k-type plans are simply not working for most American workers. No surprise there, because they never were meant to. The 401k was conceived as a supplement for traditional pension plans, not a replacement for them.

This explains the pension envy: people look at the puny savings they have collected for retirement in their IRAs and read about how public employees are doing better than they are—and then, rather than ask “why is my retirement plan so bad?” they ask “why is theirs so good?”

In a rational world we would look at examples of things that actually work and try to build from there, instead of looking at the ones that don’t and using them as a starting point. But of course it makes sense to begin from failure if you’ve already decided what you want the solution to be. It also makes sense to do that if you have convinced yourself that all of our existing institutions and ways of doing things are inherently flawed and irreparably broken. I’m willing to match my contrarianism up against anyone’s on most days, but I’m not so much of a cynic that I can believe that everything we’ve ever created was created in bad faith. I’m also not so cynical that I can believe that nothing we have is worth saving. Chalk it up to blind, stupid, naive faith in the idea that people will do what’s good for others when they see that it’s good for them too. I know I benefit when everyone has a social safety net because providing one for them is more efficient and less expensive than trying to piece together a fix in the middle of a crisis.

In the end, an ounce of prevention is worth a pound of cure. It seems to me that our growing cynicism toward public things, public employees, and government itself, is feeding a frenzy to dismantle a system that, with a little responsibility and an equal amount of commitment, could function very well indeed. Wouldn’t it be nice if we could strike a balance between bloated big government and good government that actually delivers on the promise of improving people’s lives instead of adding frustration to them? Maybe we can work on that before the next election rolls around.

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Dave Powell

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Dave Powell is Associate Professor and Chair of the Education Department at Gettysburg College. A modified version of this article first appeared in the regular column he writes for Education Week as “The K-12 Contrarian.” Follow him on Twitter @profpow.

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