Phase Out All Government Employee Pension Plans

A strikingly common element of the financial ruin that is sweeping all levels of American government—federal, state and municipality—is the presence of out-of-control pension obligations for government employees. It’s time to institute a ban on the entire concept of pension plans for government employees—prohibiting the formulation of new plans and phasing out all existing plans. Government needs to be compelled to compete for workers on the basis annual compensation only, and get out of the retirement compensation business altogether. They can include as an employment benefit a few consultations with a financial planner to help the government employee plan for his or her own retirement, but that’s it.

Why?

Because the creation and negotiation of government pension plans does not involve an honest, arm’s length, and accountable negotiation. The politicians who make government pension plan promises do not have to keep them; only the taxpayers do. Whenever promises are made using OPM – other people’s money – the risk that the promises will not be kept is very high. But when those promises are made by politicians, many of whom are long gone when the bills come due, the risk that the promises will not be kept is almost not a risk—it’s a guarantee.

Ah, you say, but corporations sometimes offer pension plans, and the individual people who negotiate them on behalf of the corporations may also be long gone when the bills come due. That’s true, and it’s frankly an argument for banning pension plans at corporations, too, because their track record isn’t a whole lot better than the governments’—and for the same basic OPM reason. But at the very least, the corporate ‘promiser’ can only affect the fortunes of the corporate shareholders who choose to invest in the corporation, not the entire taxpaying community. Also, investors in corporations choose to become such with full information available to them as to the financial condition of the corporation, and the knowledge that the corporation is expected to run its business profitably—that is, to make sure its revenues do not exceed its expenses.

Government has no profit motive; taxpayers have in any case next to no comprehensible financial information about any level of government, and even if they did, they have no choice about whether or not to become a taxpayer. And the government ‘promiser’ is an elected individual who is typically elected based on his/her positions and qualifications relating to maybe a dozen issues, rarely even one of which involves the financial/actuarial/investment expertise necessary to evaluate the cost and sustainability of employee pension plans.

Ah, you say, but government can hire the necessary expertise and get advice on what can or can’t be done. That’s true, too, but the presence of expert advice simply can’t neutralize the fundamental flaw—a promise made with OPM. If the expert’s advice is to scale back on the pension plan obligations because the government can’t afford them, the advice is too easily disregarded--either ignored because of the political risks involved in accepting it, or disputed or denied based on the simple ‘out’ of believing “well, we can always raise taxes”.

At the simplest level of human nature, promises are most likely to be kept if the maker of the promise and the performer of the promise are one and the same individual person—especially if the promise involves the payment of money. Conversely, the greater the separation between promiser and performer, the more likely it is that the promise won’t be kept. No need to get wrapped around the axle over the meaning of ‘separation’--just keep it simple: if I go to my neighbor A and we both agree that he should have a better landscaping service for his yard, and I promise him that neighbor B will pay for it, neighbor A will (and should) laugh at me. Common sense tells neighbor A it’s just not a promise I can keep, even if for some reason neighbor A thinks I have the authority to make it.

We don’t need to make a law that prohibits me from making promises that neighbor B will pay neighbor A. Common sense is enough, and where it fails, the legal system will catch up to me eventually.

We might hope that our elected officials would have enough common sense to avoid making promises they can’t keep. And where they don’t have enough common sense—as we are seeing now with regard to pending municipal, state and national bankruptcy—the legal system does catch up with them, not because of any genius aspect of the system but because mathematics are apolitical. The numbers won’t work. But the government financial meltdowns of 2010 tell us we’re going to have to go farther. We don’t have elected officials with the common sense to avoid making pension plan promises they can’t keep, so we need a law to tell them pension plan promises are promises they can’t make.

Paul Gable

May 26, 2010