Looking at the Causes of the Public Pension Problem in America

FirefighterSubmitted by Elaine Magliaro, Guest Blogger

In the past couple of years, we’ve heard many reports from the mainstream media about how the pension funds of public sector workers are experiencing shortfalls and how they are bankrupting states and municipalities that may be unable to fulfill their pension obligations. All of the blame for this problem has been laid at the feet of public sector workers and their unions. Have the mainstream media presented the public with a true picture of the “pension crisis”—or have they just been repeating the talking points fed to them by certain politicians, organizations, and think tanks? Are “greedy” public sector workers and their unions truly responsible for the “pension crisis”—or are there other causes that are at the root of the problem?

David Cay Johnston, a Pulitzer Prize winning investigative journalist and book author who is a specialist in economics and tax issues, wrote about the issue of public employee contributions to their pension funds in the state of Wisconsin in March of 2011:

When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees’ fight over collective bargaining.

Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles.

Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to “contribute more” to their pension and health insurance plans.

Accepting Walker’s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

Out of every dollar that funds Wisconsin’s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages — as pensions when they retire — rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

In an appearance on Ed Schultz’s news program, Johnston expounded on the subject:

Everybody who has a job who gets any kind of fringe benefits, that`s part of their compensation. And once you have performed the services, the money is yours.

And how the money is divvied up, whether the workers have it direct from the paycheck or its paid directly on behalf of the employee, which is the language in the labor contracts in Wisconsin — on behalf of the employee — they earned the money. It`s not the taxpayers`. The taxpayers bought their services.

David Cay Johnston on Gov. Scott Walker’s False Claims of Taxpayer Subsidies for Workers’ Pensions

In August 2012, Dave Johnson penned an article for Campaign for America’s Future titled Discover The Network Out To Crush Our Public Workers. In it, he wrote of how he had found it difficult “to read, watch or listen to the news without hearing that public employees are paid too much and get ‘lucrative’ pensions and this is ‘bankrupting’ your state, county or city.” He said people were getting the same story over and over—and it seemed to be coming from “everywhere.” He added that it was all “part of a broad, nationwide attack on public employees and their unions…” He said that the pension reform campaigns that were going on in a number of states across this country were coming at a time when the states were experiencing budget shortfalls and were seeking solutions to them. He claimed that the “storyline” the public was getting was diverting their attention from the “real culprits.”

Johnson wrote that at a time when people in this country should be laying blame on the financial institutions that caused the financial crisis in this country, studies and public relations tactics were laying the blame on public employees and their unions.

He continued:

The fact that this is happening in several states, from organizations linked in many ways, with similar language, similar tactics, quoting the same “studies”, from organizations with similar boards, etc. suggests this is a coordinated strategy, designed to have the appearance of popular uprising.

In 2011, Dean Baker, a macro-economist and co-director of the Center for Economic and Policy Research, wrote an article for Huffington Post titled Public Pensions 101. In it, he provided insight into the attack on public pensions. Baker wrote:

With the recent spate of attacks on climate science and evolution it should not be a surprise that traditional defined benefit pensions in the public sector are now also under attack. There are powerful political actors in this country who are anxious to build a bridge back to the 19th century; taking us to a time where working people enjoyed few protections and could not count on sharing in the gains of economic growth.

The effort to weaken or destroy public sector unions and take away their pensions is the latest battle in this larger war. As usual, the right has been busy making things up to push its agenda, confident that the media will not expose untrue claims.

At the center of the right’s story is the view that governments are somehow being reckless or irresponsible when they provide guaranteed pensions for their workers. They tell us that these guaranteed benefits will bankrupt state and local governments, imposing impossible burdens on future taxpayers.

This story can be easily shown to be untrue. While the right has been scaring the public with talk of a trillion dollars in unfunded liability in state pensions, this sum can also be expressed as about 0.2 percent of state income over the time-frame in which the liabilities will have to be paid.

Baker said it was important to “recognize” the main factor that had contributed to the present problem facing underfunded public pensions—“the collapse of the housing bubble and the subsequent downturn in the economy and the stock market. The plunge in the stock market led to a sharp decline in the value of pension fund assets.” The collapse also led to the budget shortfalls facing state and local governments all across the country. Those shortfalls, in turn, resulted in state and local governments making reduced payments to pension funds.

Baker provided numbers to show the comparison in payments made to state and local pensions before and after the financial meltdown:

In the period since the beginning of the recession, annual payments into state and local pension funds have averaged $6.9 billion less than withdrawals. By contrast, in the three years prior to the downturn, payments averaged $18.4 billion more than withdrawals.1

In the executive summary of his report titled The Origins and Severity of the Public Pension Crisis (Center for Economic Policy Research, 2001), Baker wrote that there have been cases where pensions were underfunded prior to the plunge in the stock market in the years 2007-2009. Still, that underfunding, he said, is not the main reason why pensions are facing difficulties today. According to Baker, “$80 billion of the shortfall is the result of the fact that states have cut back their contributions as a result of the downturn.”

Matt Taibbi, in his recent Rolling Stone article titled Looting the Pension Funds, takes us back even further than the financial crisis of 2007-2009—to 1974, when Congress passed the Employee Retirement Income Security Act (ERISA). Taibbi says that the purpose of the ERISA legislation was to “protect the retirement money of workers with pension plans. ERISA forces employers to provide information about where pension money is being invested, gives employees the right to sue for breaches of fiduciary duty, and imposes a conservative ‘prudent man’ rule on the managers of retiree funds, dictating that they must make sensible investments and seek to minimize loss.” Unfortunately, this law that was supposed to protect workers had a big loophole: “It didn’t cover public pensions. Some states were balking at federal oversight, and lawmakers, naively perhaps, simply never contemplated the possibility of local governments robbing their own workers.”

Taibbi claims that politicians started taking liberties with pension money. Some began borrowing cash from the public pension funds “to finance other budget needs.” Some officials also shirked their responsibility to public employees by failing to make their Annual Required Contributions (ARC)—even though they were required to by law.

Taibbi continued:

Here’s what this game comes down to. Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff. It’s the governmental equivalent of stealing from your kids’ college fund to buy lap dances. In Rhode Island, some cities have underfunded pensions for decades. In certain years zero required dollars were contributed to the municipal pension fund. “We’d be fine if they had made all of their contributions,” says Stephen T. Day, retired president of the Providence firefighters union. “Instead, after they took all that money, they’re saying we’re broke. Are you f*cking kidding me?”

David Sirota wrote a report titled The Plot against Pensions for the Institute for America’s Future that was published recently. His report evaluated the general state of the current debate taking place over public pensions as well as the “specific effects of the partnership between the Pew Charitable Trusts’ Public Sector Retirement Systems Project and the Laura and John Arnold Foundation.”

Sirota’s Findings:

  • Conservative activists are manufacturing the perception of a public pension crisis in order to both slash modest retiree benefits and preserve expensive corporate subsidies and tax breaks.
  • The amount states and cities spend on corporate subsidies and so-called tax expenditures is far more than the pension shortfalls they face. Yet, conservative activists and lawmakers are citing the pension shortfalls and not the subsidies as the cause of budget squeezes. They are then claiming that cutting retiree benefits is the solution rather than simply rolling back the more expensive tax breaks and subsidies.
  • The pension “reforms” being pushed by conservative activists would slash retirement income for many pensioners who are not part of the Social Security system. Additionally, the specific reforms they are pushing are often more expensive and risky for taxpayers than existing pension plans.
  • The Pew Charitable Trusts and the Laura and John Arnold Foundation are working together in states across the country to focus the debate over pensions primarily on slashing retiree benefits rather than on raising public revenues.
  • The Laura and John Arnold Foundation is run by conservative political operatives and funded by an Enron billionaire.
  • The techniques used by conservative activists to gain public support to privatize the public pensions that public workers have instead of Social Security are, if successful, likely to be used in efforts to privatize Social Security in the future.

NOTE: I plan to write another post on the pension problem. It will focus on the efforts to reform public pensions and the organizations that are behind the campaign.

Looting the Pension Funds: All across America, Wall Street is grabbing money meant for public workers (Rolling Stone)

The Origins and Severity of the Public Pension Crisis (Center for Economic and Policy Research)

The Plot against Pensions; How Pew and the Arnold Foundation Plan to Undermine America’s Retirement Security (Institute for America’s Future)

Pew’s pension reform activism drawing critics: Some concerned over recent advocacy role in public pension reform (Pensions & Investments)

Public Pensions 101 (Huffington Post)

Promise Breakers: How Pew Trusts Is Helping to Gut Public Employee Pensions (Frying Pan News/Huffington Post)

The “Liberal Press” Continues Its Assault on Unions, Pensions, and Public Employees (Huffington Post)

Note To Gov. Walker: Wisconsin Pension Plan Is 97 % Funded, Could Pay Benefits For More Than 18 Years (ThinkProgress)

Matt Taibbi on How Wall Street Hedge Funds Are Looting the Pension Funds of Public Workers (Democracy Now!)

A Hedge-Fund Billionare From Texas is Waging War On California Pensions: The Arnold Foundation is clearly in the forefront of nationwide efforts to scale back pensions for state and municipal workers. (AlterNet)

Exposed: Enron billionaire’s diabolical plot to loot worker pensions: How an Enron billionaire, Wall Street and a major “nonpartisan” foundation are quietly robbing American workers (Salon)

Why Does a Texas Billionaire Care So Much About Our Pension? (Oklahoma Education Association)

Rhode Island Treasurer Misleading Public Is Worse Than Withholding Hedge Fund Information (Forbes)

The Wisconsin Lie Exposed – Taxpayers Actually Contribute Nothing To Public Employee Pensions (Forbes)

Enron Billionaire and Pew Trusts Looting Public Pensions (Occupy.com)

 Matt Taibbi on Wall Street’s Campaign to Loot Public Pensions (Bill Moyers)

Report Exposes the Right-Wing Tag Team Plotting Against Pensions (Truth-Out)

David Cay Johnston: Wisconsin Public Workers Earned Their Pensions — It’s Not the Taxpayers’ (Crooks and Liars)

117 thoughts on “Looking at the Causes of the Public Pension Problem in America”

  1. The story that Elaine missed is the worst abuses of pensions are by charities and churches. Congress passed laws protecting those nonprofits from financial interference. Well, those organizations are some of the worst offenders because there is NO oversight. Government pensions are the next worse abused, again for the same reason, no laws to protect the employees pensions. And, the union leaders just let it happen w/o much of a squeak. Their mouths are too full. Private pensions are less abused than the aforementioned two categories. Not because they are better people, but because there are @ least some laws controlling them. Executives go to prison for ERISA violations. The former great Tigers pitcher, Denny McClain, the last to win 30 games in a season, served some serious time.

  2. Elaine, I’ve fallen behind but I will get over there (CPP) before long. There’s too much happening to stay on top of our current crop idiots and now we have to watch out for Meese (again!). Thanks to a Turley post on the ATF and the Dobson book, I’m going to have to relocate a fair telling of F&F. I read a great one a while ago and it was a complicate story with a number of bad actors. Can’t remember if Dobson was one, but he gets no pass from me since Issa and Grassley wrote a forward for his book. The book “ban” does look like a bad call by some ATF idiot, but I do hate it when Turley’s souce is The Washington Times (or the Daily Mail). Both very conservative rags.

  3. Jeebus, Elaine, that post of 2/20/11 is some fine piece of work! I wonder if Nick has read it. I doubt it….none of the comments (offering more great reading and background) were by Nick, and taken as a whole destroy all his objections to unions. But Nick sees “Unions” and only sees “fat cats”. I see “Unions” and the formation and protection of the middle class. The unions and the GI Bill made this country great. Scott Walker is not worthy of cleaning the teacher’s break room.

  4. pdm,

    Did you this Pierec post today?

    The Reagan Undead
    By Charles P. Pierce

    Jesus god, Ed fking Meese?

    “Shortly after President Obama started his second term, a loose-knit coalition of conservative activists led by former Attorney General Edwin Meese III gathered in the capital to plot strategy. Their push to repeal Mr. Obama’s health care law was going nowhere, and they desperately needed a new plan.”

    I didn’t know that there was an Old Timer’s Game for Authoritarian Yahoos.

    Will the sad detritus of the Saint Ronnie administration ever stop fouling American public life? We have Our Lady Of The Magic Dolphins on the teevee almost every weekend. We had a whole clutch of the foreign-policy fantasts rehabilitated during the late reign of C-Plus Augustus. And now, this guy, who once advocated concentration camps for student demonstrators, who personally oversaw the most embarrassing “investigation” into the porn industry ever conducted, and who functioned as lookout and getaway driver for the Iran-Contra crooks, up to and including the increasingly dim president himself, comes back to help screw up the nation again. Nobody listens to Gary Hart, but Edwin Meese III still has a place in public life. Wingnut welfare is forever.

  5. Elaine, do you sometimes wonder what it would be like if Friedman of the Plains indulged in a little conversation with Oky?

  6. Elaine, Pierce is the best. I wish more Turley readers read CPP. And the commenters are priceless. They often give me the only laugh I get in these hard times.

  7. Elaine, thanks for the older postings. I’m anxious to read them carefully. I’ve only just skimmed them so I’ll know better after a careful reading, but have either of them weighed in on the legality of ending collective bargaining? A fast skim of Turley’s post seemed to focus on the prank phone call. I guess that was of some entertainment value, but does not address the more weighty questions of law.

    Many, many thanks for taking on this issue in your usual careful and comprehensive way. I am always impressed by the GBs and the issues they tackle.

  8. Nick, how about posting some sources that relate how the public sector employee is thriving now that the unions have been defanged? “Sources” being the key word in that sentence. And I’m not looking for how union membership has dropped. The explanation is pretty obvious. It’s rather like joining a tennis club in order to play tennis and then they destroy all the courts.

  9. pdm,

    Is the Scott Walker Story Just the Tip of the Koch Brothers’ Political Iceberg?

    Last week I wrote up a post titled Scott Walker: A Fiscally Responsible Governor or a Politician Who Is Playing Favorites?. Judging from the number of comments left at that post, it appears that people are very interested in what’s been going on in the state of Wisconsin. I think many people may believe that as Wisconsin goes—so goes the nation…and probably the life expectancy of labor unions and collective bargaining.

    What got a lot of press attention was the story of the prank phone call that Governor Walker received from gonzo journalist Ian Murphy. Murphy pretended to be billionaire industrialist David Koch. He talked to Walker for twenty minutes. Murphy reportedly told the Associated Press he made the prank phone call in order to show how candid Walker would be in a conversation with Koch at a time when Democrats claim the governor was refusing to return their calls.

    The prank phone call appears to show a cozy relationship between Walker and Koch, a top campaign donor who may have a financial interest in fighting unions. Union workers protesting in Wisconsin have already made monetary concessions to help with Wisconsin’s budget shortfall. One has to wonder what is really behind the governor’s demand that public employee unions be stripped of their right to bargain collectively. Is it all part of an agenda to “take unions out at the knees”—a strategy suggested by Scott Hagerstrom at the annual conference of the Conservative Political Action Committee (CPAC)? Hagerstrom is the Executive Director of Michigan’s chapter of Americans for Prosperity (AFP).

    In a Mother Jones article, Andy Kroll writes: “Walker’s plan to eviscerate collective bargaining rights for public employees is right out of the Koch brothers’ playbook. Koch-backed groups like Americans for Prosperity, the Cato Institute, the Competitive Enterprise Institute, and the Reason Foundation have long taken a very antagonistic view toward public-sector unions.”

  10. pdm,

    I wrote a few posts about Walker and Wisconsin in 2011. Here’s an excerpt from one of them:

    Scott Walker: A Fiscally Responsible Governor or a Politician Who Is Playing Favorites?

    There’s been a lot going on in Wisconsin in the past week. I hope most Americans are aware of the reason why so many Wisconsinites have converged on the state capital to hold demonstrations.

    Wisconsin Governor Scott Walker, a Republican, claims that the state is in financial trouble. He’s asking teachers, plow drivers, janitors, nurses, garbage collectors, and other public sector workers to contribute more to their pensions and to pay a larger amount of their health premiums. It appears many of those workers are willing to negotiate with the governor and to consider having more money taken out of their paychecks for their pensions and health insurance. What those employees are not willing to do is relinquish their right to collective bargaining.

    I can understand why Governor Walker is asking public employees to have more deductions taken from their paychecks during these fiscally difficult times. What I question is his budget-repair bill that would strip public employees of their right to collective bargaining. If the governor believes that taking away that right will help with the state budget shortfall, why isn’t he demanding that police, firefighters, and state troopers give up their right to collective bargaining too? Could it be political payback? Does that sound like a possibility to you?

    Here is an excerpt from an article that Todd Richmond wrote for Bloomberg:

    Walker has introduced a bill that would strip public employees across the board — from teachers to snowplow drivers — of their right to collectively bargain for sick leave, vacation, even the hours they work. But absolutely nothing would change for local police, fire departments and the State Patrol.

    The bill smacks of political favoritism for public safety unions that supported Walker’s election bid last year and sets up new haves and have-nots in Wisconsin government, said Paul Secunda, a Marquette University professor who specializes in labor law.

    “That’s called ‘thank you, I got your back,’” Secunda said. “There’s no surprise there. This is the worst type of favoritism there could be.”

  11. Nick, didn’t Walker and the Republican legislature pass a law that eliminated union bargaining? Gee, I wonder why they did that. And I sure do not understand the legality of that. (Was there a Turley post on that issue?) Could that have impacted their decision to join a union? Are you able to see that Walker and the legislature were operating for political motives? Are you able to see that Republicans have always wanted to destroy unions? What better way than to eliminate bargaining power. Nothing radical about that.

    As far as “the people” being screwed – the people are being manipulated.

    You may read. You do not see.

  12. The plundering of private and public sector pensions is a real scandal. The greedy corporate b@stards who do it are evil. We agree. Apparently you give the union bosses, the people members TRUST to prevent this stuff, a total pass. I put them in the Judas category, in some ways more evil than the robbers themselves. The union bosses are too often worse than the shop bosses.

  13. pdm, I read ALL the stuff. And, I read EVERYTHING critically pro and con. Regarding public unions, the taxpayers have been screwed. And, they “Are mad as hell and they’re not going to take it anymore.” You know, when the feces hit the fan in Wi. many critical thinking public union members saw, for the first time, how their fat cat leaders REALLY thought. When negotiations were @ the last juncture, and the union leaders saw Walker had the votes to make union membership voluntary[boy is that radical!!!], the union gave up their members in a NY minute. They offered to have their members give up free health benefits. The untouchable was the indentured servitude they had over all public employees. The reason is simple, THAT’S THEIR CAVAR. They knew, if union membership was voluntary, they were going to lose THEIR JOBS. I know many state employees, many were pissed. It was gut check time for union bosses, and you always see what someone is REALLY about when it’s gut check.

  14. pdm,

    I left the follow comment on Mike Spindell’s post yesterday:

    Elaine M. 1, October 7, 2013 at 9:09 am


    We are being manipulated all the time. The manipulators have been successful. They have the common people warring with each other–red against blue…Democrats against Republicans…liberal against conservative…private sector workers against public sector workers, etc. And while we the common people are arguing with/fighting each other, the corporate and political manipulators are robbing us blind. Our tax dollars bail out millionaires and billionaires. The pension funds of both private sector and public sector workers are being plundered.

  15. Elaine, I wonder if most (some?) people erroneously believe the losers are always union workers. I have no idea of what the numbers would be, but I’m petty damn sure lots of those pensions were not owed to a union member – just plain old ordinary working folks who thought they would get a pension upon retirement.

    As you know, many of these people have now been moved into 401ks, which has another way of making huge profits for the mutual funds. I’m guessing you’ll focus on that on Part II. Lord help us when they try (again) to do this to social security. Unfortunately, I think they will have a better chance of doing it this time. Their propaganda has poisoned the idea of pensions very effectively. So many (a few here?) curl their lip and snarl about how greedy the “other” guy is.

  16. OK, Nick. Let’s give you that all the union fat cats are lying, stealing, caviar eating scum. What are we left with? Millions of workers, public and private, have been screwed. You need to get over your crazy hate for union people, and read some of this stuff. A man with all your fine qualities will surely see the injustice that has been done.

  17. i won’t pretend i know all about financial machinations but i do know there is a way to make money off of the market going down if you know when to bet that way. my worry is that some of the market geniuses may have found a way to make a lot of money from the market drop if/when the vote to extend the dept ceiling comes up.

    and to hell with the rest of us.

  18. Amazing link Elaine. Bankruptcy is another way that companies dodge their pension responsibilities.

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