I have a feeling these graphs do more to explain the problems that Berkeley professor wrote about (http://blogs.berkeley.edu/2010/08/24/a-letter-to-my-students...) than the explanations he proposed.
I'm afraid public employee compensation reform probably loses on both counts.
Defined contribution 403(b) and 401(k) programs have to have their deposits made soon after each year end. Defined benefit plans are more complicated, but there are big federal fines for companies that fail to deposit the increase in expected value of future payments each year. There are extensive (but imperfect) actuarial rules in the US Code to make the actual minimum contribution match the needs of the pension fund. Big funds need to buy insurance, too, in case things go wrong.
States and municipalities are immune from the federal standards. That's why they're ignoring the consequences and just promising to pay pensions without depositing enough money according to their own actuarial computations. A private company would have had to cut back on promises or pay the full current cost of future benefits.
Heck, even the Federal Government is keeping up with employee pension planning. The trouble is all in states and municipalities.
The states know they are doing this; actuarial science is not a mystery. But governors and legislators figure that public employee unions must be satisfied. And the problem won't explode until they're out of office and then it's someone else's problem.
And we voters who don't hold them responsible are ultimately at fault. Public employee unions couldn't hold politicians captive if we were willing to vote out pols who kowtow to irresponsible demands.
Anyway, the whole point of representative democracy is to not have to consult the electorate for every little thing. Voting on pay is too nitpicky. The best alternative I can think of is that no one bargaining contract can run longer than 5 years, but that just swaps one set of problems for another.
When they look at their tax bills, reduced 401k benefits, layoffs and uncertain retirement dates, damn straight they will. http://blogs.forbes.com/digitalrules/2010/06/01/the-milliona... http://walnutcreek.patch.com/articles/walnut-creeks-100k-plu...
Approval rating seems ok:http://www.washingtonexaminer.com/opinion/blogs/beltway-conf...
Where we differ is in our belief over whether California voters would actually pass such an initiative at the polls. On past forms, I think campaign slogans would beat out economics or critical thinking. I do think ballot initiatives are a good thing in general, but as a state we have also passed some very foolish laws, whose long-term impact was not appreciated at the time. 'Three strikes' leading to life in prison is the most obvious example.
In addition when you know an employee is going to cost you a lot of money in pension, the incentive to reduce the work force as much as possible is high.
You end up in a situation where your budget is used to pay for the retired employees and you have nothing left for active employees.
One of the reasons you are there is that it's pretty tempting for someone in command to offer a lot in pension. Under his command the budget remains clean and the employees are happy. That has got to ease elections!
One way to avoid that would be to change the way the yearly budget is computed so that it includes "known future expenses" clearly.
Don't any of these places have accountants? Surely, there should be some requirement to recognize the future costs being taken on, properly discounted for net present value?
Or am I just naive?
I generally agree with the governor, but I also tend to believe that the state has to make good on past obligations -- especially when real people have planned their lives around those obligations. The 55-year-old retiree with fat benefits is a political straw man, but reality is much less clear.
But the Berkeley professor is still right in a way. Every single dollar in future retirement pay or health benefits for a public employee was negotiated in good faith in exchange for lower pay right now, this year, so we can balance the budget. Throw in term limits and a little demagoguery and politicians have every incentive to cut a deal that balances the budget this year while kicking costs down the road.
So when the Prof mentioned that for the last 30 years, our society has been taking out a loan for our kids to repay, he was still correct, especially when looking at these graphs.
Basically, yes - pensions are a problem. But the graph on the number of California gov't employees that lost their jobs vs. private sector employees may be misleading because we _need_ the public sector employees to service basic needs in the state, and California employs one of the lowest number of public sector employees per capita of any state.
1. Increased promises to the public sector workforce.
2. The need to make up shortfall in the funding due to market declines.
3. The need to make up shortfall because the funding was insufficient to begin with, owing to accounting ... creativity.
4. The boomers are just now hitting retirement, so the number of people retiring in a given year is increasing (Actually, it'd be interesting if somebody could pull out some hard numbers on this - I've heard this spoken of anecdotally a lot lately).
5. Retirees are drawing on their pensions for longer because they have longer lives.
1) Many pensions are underfunded. The state has to play "catch up" because they weren't putting enough money in the fund in the past.
2) Pension funds play the stock market. In a recession, the fund needs more money because the market is down.
3) (I'm not sure this is the case for California, but it's definitely the case for the federal gov't) The gov't often guarantees pensions issued by bankrupt companies. The gov't just takes on the extra debt, and often bankrupt companies don't keep up with their pension contributions.