Scribbler: As someone who has written a paper about pensions, you must be tremendously disappointed by the pension bill just passed. As our fellow scribblers at the Los Angeles Times said, “Brown’s plan to stem pension costs is no panacea.”
Curmudgeon: Panaceas are as hard to find as unicorns and Mitt Romney tax returns.
Scribbler: But surely you agree with Dan Walters that the “Pension overhaul plan falls short.”
Curmudgeon: That headline is also going to be on Walters’ column the day after the Second Coming. He will fault Jesus for not having returned hundreds of years ago to spare millions from hellfire and damnation, and he’ll scoff that salvation is just a promise, easily revoked when Yahweh throws one of his Old Testament fits of temper, or needs a contribution from the prison guards.
Scribbler: So you think it’s real reform?
Curmudgeon: What is “real reform?”
Scribbler: Don’t go all Socratic on me. Even under AB 340, most public workers in California will have pensions better than most people in the private sector.
Curmudgeon: True. Public workers will still enjoy more security than the huge numbers of private-sector workers who have totally inadequate retirement plans, or none at all. But as Micah Weinberg and I wrote in our paper, taking away retirement security from public workers doesn’t add to the sum of well-being in society. Envy is not reform, it’s one of the seven deadly sins, best cured by repentance and prayer.
Scribbler: Okay, but you agree that pensions are way too expensive, right?
Curmudgeon: If pension costs are your measure, then the bill certainly counts as reform. It reduces the pension formula for new workers, requires employees to pay half the normal cost of pension contributions, caps the size of pensions, and curbs lots of abuses. That will save a lot of money.
Scribbler: But former legislator Joe Nation, now at Stanford and a pension critic, says that “No one should believe that this is going to have an appreciable impact on the public pension problem.”
Curmudgeon: CalPERS actuaries estimate that AB 340 will save the public between $43 billion and $56 billion over the next 30 years. The present value of that savings is between $12 billion and $15 billion, roughly equivalent to what the state spends each year to run the prisons and support the two university systems, UC and CSU. (If CalPERS’s estimates used the low discount rate that critics like Nation trot out to puff up their estimates of the system’s unfunded liability, the present value of the savings would be much larger.) Hobnobbing with the billionaires in Silicon Valley may have warped Nation’s sense of proportion, but like most folks, I still count saving $12 billion as “an appreciable impact.”
Scribbler: So you do, in fact, think this is real reform. How can you say that when the large pensions promised to current workers haven’t been curtailed?
Curmudgeon: And just how might you go about curtailing those pensions? The courts have been firm in ruling that pensions are a contractual obligation that can’t be retroactively taken away.
Scribbler: Pension hawks like David Crane and Joe Nation say that the law isn’t as clear as it appears and that local governments ought to try to convince the courts that reducing future pension accrual by current workers is permissible because the only alternative is deep cuts to parks, libraries, and public safety.
Curmudgeon: If they want to mount a full frontal attack on the machine gun nest, I wish them all the luck in the world. Just remember, though: Judges have pensions too.
Scribbler: What a cynic. So we just give up now?
Curmudgeon: No, not at all. But we ought to try to think more clearly about the real issue here. It’s not pensions. What matters is total compensation for public employees. The public needs to hire people to teach our children, guard our streets, put out our fires. In return for their work, we pay them with a package of compensation, some of it providing them current income, some of it future income: a wage, a health insurance plan, a pension, employer contributions to Social Security and Medicare, and, in some cases, retiree health benefits. As a taxpayer, I don’t care how public workers want to divide that bundle of compensation between current pay and retirement income. I care about the total cost to the public employer.
Scribbler: What’s your point?
Curmudgeon: The point is, if you understand the real issue, it becomes obvious that there may be more promising strategies than attacking the machine gun nest, with its protective legal bulwarks. We can achieve lower total costs more easily by reducing or containing other parts of the package.
Scribbler: Such as?
Curmudgeon: Nation has suggested that California recoup some of those overly generous pensions with a surtax on the pensions of “double-dippers,” public retirees who collect a pension while they continue to work.
Scribbler: That’s all?
Curmudgeon: For years there has been growing concern among budget wonks about the growing cost of, and unfunded liability for, retiree health benefits. Now we have a real opportunity to act. Retiree health benefits are a relic, first authorized in 1961, before the passage of Medicare. Even after Medicare came into being, its benefit package was incomplete, and workers who retired before Medicare age had no assurance that they would be able to qualify for, or afford, coverage in the individual market. The passage of the Affordable Care Act has changed all that. In 2014 every retiree, early or not, will be able to buy health insurance regardless of pre-existing conditions. Obamacare has solved the problem retiree health care benefits were created to address. We can, in good conscience, eliminate them and harvest for state and local budgets the savings made possible by our historic move to universal health insurance.
Scribbler: Doesn’t that create legal issues, too?
Curmudgeon: For people already retired, yes. But there’s no bar to eliminating retiree health benefits for new workers and those for whom they have not vested, either because of insufficient years of service or contractual language.
Scribbler: That’s your panacea?
Curmudgeon: No, you haven’t been listening. There are no panaceas—never are, never will be. Over the last generation, the combination of a broken governance system and public inattention has allowed the total compensation of public employees—and most particularly that of police, firefighters, and prison guards, which is far out of line with national standards—to soar. It will take years of hard bargaining and sustained attention to the issue to bring that compensation back in line. For example, my calculations suggest that the considerable savings achieved in AB 340 would be totally wiped out by a 7 percent pay increase. If we don’t keep watching, the gains will disappear.
Scribbler: Do you really think that the media, politicians, and public in California are capable of that sustained attention?
Curmudgeon: Hey, how about those Athletics and Giants!