The Homa Files

I’m a believer that commitments should be kept.  Even when they turn out to be disadvantageous.

So, I’m conflicted.

For decades, companies and governments have made major concessions to their employees — often reflected in lucrative retirement and pension plans (think UAW and Federal gov’t), regarded as too distant in the future to worry about, and inconsequential if growth rates stayed very high.

Well, now they (and we) are paying to the piper.

The pension obligations in most states and for many companies is choking the economic horse.

And, there’s no means of avoiding the burdensome costs — save for reneging on past deals made.

Since I rule out that option, I see our economy saddled by these obligations until retirees have the political courtesy to go meet their maker. 

That’ll take awhile … though the rate may accelerate under ObamaCare’s seniors’ rationing rule.  Hmmm …

* * * * *

Excerpted from WSJ: How to Tackle Government Labor Costs, April 29, 2010

State and local governments’ … pension obligations are underfunded to the tune of $1 trillion … propelled over the last decade by rising municipal employment.

The inescapable conclusion: Labor costs, which at $1.1 trillion in 2008 account for half of state and local spending, simply must come down.

Years ago, there was an informal “social contract” — public employees generally received lower wages than private-sector workers, and in return they got earlier retirement and generous pensions, allowing them to catch up.

For years, state and local government employees have received pay increases in excess of inflation, and they now have wages that are 34% higher on average than in the private sector.

Partly responsible for these trends is unionized …  pay levels higher than needed to attract qualified employees. The average quit rate among state and local employees is a third of that in the private sector.

Public employees also have a 70% advantage in benefits. Health insurance, retirement benefits, life insurance and paid sick leave are not only much more available to them, but much richer. In 2009, the costs of health insurance were 2.18 times as much for state and local employees as for private-sector workers.

Public-sector retirement costs also are high because many can retire at age 55 after 30 years of employment with pensions equal to 60% or more of final salary, which is often jacked up by lots of overtime in final working years. In some states, employees can “double dip” by retiring early and then resuming their previous jobs or taking other government positions. So they get salaries and pensions at the same time.

With slow economic growth, limited income expansion and high unemployment likely in future years, a taxpayer revolt may be brewing.

Americans still want basic municipal services like police and fire protection, good schools for their kids, clean streets and garbage collection, but at lower costs and budgets that don’t kick the deficit can down the road.

State and local government labor costs can be reduced in an orderly way.

• Following in the footsteps of bankrupt GM, two-tier wage structures would allow existing employees to continue at current salaries, but pay new hires much lower wages that are nevertheless adequate to attract and retain qualified people.
• And the new people can be enrolled in defined-contribution pension plans that require employee contributions instead of defined-benefit plans. Retirement ages can be increased.
• While waiting for existing employees to retire, their pay can be frozen.
• Pension formulas can be reformed to avoid the system being gamed by heavy overtime in final years on the job, and double-dipping can be eliminated.
• Retirees in the public sector can be required, as they are in the private sector, to pay meaningful shares of their health-care costs.

These changes would be profound and shake up the high-paid, secure image of state and local government jobs. But essential services would still be delivered, only much more cost effectively. Push has come to shove.

Full article:
http://online.wsj.com/article/SB10001424052748704131404575117943161614762.html?mod=djemEditorialPage_h

This entry was posted on May 7, 2010 at 7:55 am and is filed under Economics, Financial Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.