Pensioners are not well positioned for this contest. They have little negotiating leverage. Bondholders can threaten the city with higher borrowing costs going forward or even being shut out of capital markets if they aren’t repaid as promised. There is a lot of bluster to bondholder admonitions, but pensioners cannot credibly make similar threats of withholding labor.Pensioners also make a politically attractive target for distressed municipalities. It is easier politically to cut the pensions of a limited number of employees than it is to cut services for everyone or raise taxes on everyone. In Detroit, this argument is framed as pitting the interests of 20,000 employees and retirees against the future of a city of 700,000. Pensioners get demonized as the holdouts preventing the recovery of the city.
The MSM has caught onto this story late: it’s been clear for a long time now that public pensions have been in trouble. But better late than never.While we’re pleased to see more media outlets recognize the dangers posed to public pensions, we’re rarely pleased by their proposed fixes for this problem. For Salon, Adam J. Levitin notes that public-sector pension plans, unlike private-sector ones, are not insured by the federal government. He thus encourages government to expand insurance protection to public pensions:
Expanding [Pension Benefit Guaranty Corp] (PBGC) coverage to public pension plans would not have to cost taxpayers anything. The PBGC is not taxpayer-funded. Instead, it collects premiums and invests them, just like a mutual insurance company. Premiums would not have to be particularly onerous because only a small number of municipalities would have pension funds making insurance claims in any given year. Yet being forced to pay insurance premiums would in turn impose discipline on municipalities: If premiums were based on the size of a pension’s obligations, it would also act as a disincentive for offering lavish promises of future compensation as there would be an immediate price tag for doing so. And it is hard to imagine public pension insurance creating a moral hazard: No municipal government wants to flirt with bankruptcy, even if some of the cost will be borne by others.
This strikes us less as a bold plan to protect public workers than as a last-ditch effort to avoid the inevitable: defined-benefit pensions, whether public or private, are on the way out. There are many reasons for this, but a key one is that defined-contribution plans are much safer for both employers and workers, particularly in industries where automation is decreasing the number of employees, thereby decreasing the number of new workers paying into the fund that retired workers are drawing upon. Unlike defined-benefit plans, defined-contribution aren’t bound up in the health of the company (or municipality) that provides them, and they don’t require a constant influx of new hires (or tax increases) to keep the coffers full.The private sector has already largely made this shift; only 18 percent of workers are still covered by defined-benefit plans. If automation begins to slim the ranks of the public sector workforce as we believe it will, public workers will face the same challenges. Rather than locking themselves into the defined-benefit model, struggling municipalities should shift their pension plans to a model that will survive the changes to come.[Protest photo courtesy of Shutterstock]