Friday, July 29, 2016

A Real Long-Term Solution to New Jersey’s Public Pension Mess

New Jersey’s public sector pension fund is a disaster. Everyone knows it. It is grossly underfunded, thanks to years of politicians over-promising benefits, which way exceed private sector retirement plans. The Democrats’ solution is to tax the rich, which—even if revenue projections from such a tax panned out—would barely put a dent in the multi-billion dollar gap between benefits and revenue. The Republicans? I haven’t seen much of a solution from their side, either.

Yet, everyone agrees we need both a short-term and a long-term solution. Hence, Republican Governor Chris Christie's Pension and Benefit Study Commission. The commission’s proposed long-term solution was laid out by one of its members, Thomas Byrne, in a Times of Trenton guest column titled A bleak but avoidable future. After rejecting tax increases and saying “It is unrealistic to think that we can squeeze the needed pension payments out of the current State budget,” Byrne said:

That is why the pension commission proposed a constitutional guarantee of funding, which would supersede the recent court ruling.  However, the funding would come from changes going forward to both the state pension plan and to public employee health benefits.  The plan would fully fund the $40 billion hole in the pension funds.  Benefits going forward would be lower, but still as good or better than private sector levels. The Commission can't reverse 20 years of malfeasance, but we were able to identify savings to be recycled solely for the benefit of public workers.  We dealt with reality.

The “recent court ruling” referred to a lawsuit filed by the public sector unions and others to force the state to make promised payments into the retirement funds. The NJ Supreme Court rejected the lawsuit.

The question is, how will a constitutional amendment guarantee funding without tax increases or spending cuts? There are sharp benefit cuts, of course. But the whole purpose of “pension reform” is to honor pension promises already made.

All of that aside, I think the fundamental problem is being sidestepped.

I left these comments:

The fundamental problem is that the people collecting pension and health benefits are not the people responsible for funding. Basically, public sector unions can demand, demand, demand benefits. Vote-pandering politicians can grant, grant, grant benefits. Taxpayers are stuck with the long-term bill, the total amount of which they have no way of knowing. It’s totally corrupt.

The very first reform to be enacted should be to end this system. The long-term solution is to turn control of pension and health—from funding to benefits—over to the unions. This is not just a theoretical proposal. It’s completely practical. I know. I’m currently collecting a pension through such a system.

I am a retired member of a private sector plumbers local union. Our union membership, through an elected board of trustees, controls both the pension and health benefits funds (the board also includes employer representatives).

Here are the basics of how it works and has worked for decades.

Our union representatives negotiate periodic contractual agreements with union contractors’ representatives. The main wage feature is a total hourly package. The union membership then decides, by vote, on how much of the total package goes into the pension and health funds and other purposes. For example, the total contract package may be $50 per hour (less for apprentices, more for foremen, etc.). The membership may decide to allocate $8.00 to pension; $12.00 to health insurance; and $5.00 to other purposes. The rest—$25.00—goes into our pay checks.

We the union membership, through our trustees, are responsible for keeping contributions and benefits in line. The membership understands that simply demanding increased benefits is not enough. We must also be willing to provide appropriate funding. If contributions fall short—e.g., because of a bear market or over-promising of benefits—we the union membership can not simply go back to the contractors and demand they make up the shortfall, as public sector unions now demand of taxpayers. The total pay package is set by contract. We must decide either to cut our benefits or increase funding by reducing wages. You’d be amazed at how responsible people can be when they are actually responsible for their own financial affairs. All of the incentives tend toward responsible management of the funds.

Of course, what to do with non-union beneficiaries of the public funds (of which my wife is one), the current unfunded liability, and the already-promised benefits also have to be worked out. But one thing's certain: The current system of public workers demanding and politicians granting, leaving taxpayers on the long-term hook, is corrupt to its core. My understanding is that the Pension and Health Benefit Study Commission has proposed a constitutional amendment guaranteeing full funding of the funds. Far from being a fix, a constitutional amendment is nothing more than doubling down on the same system that got us into this crisis.

Political leaders should consider the private sector trade union system as a model for truly fundamental reform. It’s transparent. The contractors know up front what they must pay workers, and know that they will not be on the hook for benefit mismanagement. Taxpayers deserve the same transparency. Public sector unions shouldn’t continue to both have their cake and eat it.


Of course, public sector employee pay would have to be adjusted upward, so that the “total pay package” reflects the switch of responsibility for funding the pension away from the state to the unions. That and other related details would have to be worked out.

Much of what government now provides, like the public schools, should be phased out and abolished. This would greatly reduce the scale of the retirement problem as education returns to the free market private sector, where it belongs. But the government, even one reduced to its proper function of protecting individual rights, will need employees. Putting these employees in charge of their own retirement planning, rather than maintaining the current corrupt system should be the long-term goal. The private sector has largely moved to 401ks, 403bs, IRAs, and the like, in lieu of defined benefit pensions. It’s time the government did the same.

Related Reading:

NJ’s Pension Funding Crisis and Public Tax Hypocrisy

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