Tuesday, July 19, 2016

The Missing Ingredient in the Debate Over the Constitutional 'Fix' for NJ's Pension 'Crisis'

In November, New Jersey voters will choose whether to amend the state constitution to require the state to fully fund the state pension system, which is now deeply in the hole. The amendment would require the state to make fixed annual payments to the pension, come hell or high water.

Mark J. Magyar, the policy director for the New Jersey Senate Democratic Office and former adviser to Republican Gov. [Christie] Whitman and the independent Daggett for Governor campaign, argued in a New Jersey Star-Ledger guest column in favor of the amendment.

Some have come out strongly against it. While Magyar clings to the classic magic Leftist fix for all of society’s problems, taxing millionaires and business corporations to fund the pension payments, others strongly disagree:

The governor and his pension commission leaders — Tom Healey, a former assistant U.S. Treasury secretary under President Reagan, and Tom Byrne, the State Investment Council chair and former Democratic Party leader — argue vociferously that making the pension payments would require massive [sales and income] tax increases on all New Jerseyans and draconian cuts to school aid and other government services.

The problem is, neither side wants to alter the basic structure of public sector union benefits. I left these comments, somewhat edited for clarity:

The constitutional 'fix' for the pension 'crisis' misses the fundamental problem—the disconnect between funding and beneficiary. Under the current setup, politicians can and do over-promise benefits to public sector employees while kicking the issue of how to pay for it down the road to future governors and legislators. The result is “crisis.” The loser is the general taxpayer.

This disconnect is inherently corrupt. The best reform long-term is to have the beneficiaries pay for their own benefits. This can be done in one of two ways; either convert to a defined contribution plan, or turn the retirement funds over to the unions to manage.  

The later way would involve setting a contractually fixed “total compensation package” for public union employees, and then let the employees, through their unions, set their own benefit schedule and then divide their total pay package between benefits and pocket salary accordingly. That’s the way it works for private sector trade unions. I am a retired member of a private sector plumbers local union. Our union membership, through an elected board of trustees—and working within the confines of a total pay package fixed by periodic contractual agreements negotiated with union contractors’ representatives—controls both the pension and health benefits funds. (The board includes employer representatives.)

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 the funds become underfunded—e.g., because of a bear market in stocks—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 our 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.

Turning the retirement funds over the public sector unions would leave a much smaller state fund for non-union employees (of which my wife is one, now retired), which can then be frozen and replaced with a defined contribution plan. The upshot would be that the public sector unions would no longer be able to conspire with political allies to boost benefits with no regard for funding. Taxpayers would know exactly what their government employees are costing them. End of crisis. End of perpetual political brawls.

Magyar’s article is titled The truth about N.J.'s pension crisis and how to fix it. But the real truth about NJ’s pension crisis is that if we don’t fix the fundamental problem, a constitutional amendment would only make it worse. Fix the fundamental problem, and we can leave the constitution out of it, as we should. As for the current underfunding “crisis,” if taxes must be raised to pay for the unfunded promised benefits, the tax burden should be spread proportionally among all taxpayers, rather than unfairly dumping the burden on a small minority whose only crime is economic success.

Related Reading:

NJ’s Pension Funding Crisis and Public Tax Hypocrisy

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