Detroit’s collapse has made serious pension reform a national story once again, and very real change in how these things are administered across the country is now a distinct political possibility. This is causing angst among those who are generally happy with the status quo, and they’re taking to the media to make their arguments. Over at the New Yorker, Vahuni Vara’s piece is a case in point, arguing that cutting pensions may not save cities much money in the long run, as they will be forced to raise employee pay in order to retain qualified employees:
It’s not a trivial matter. In January, researchers at the Center for Retirement Research at Boston College looked at teacher compensation to figure out how compensation cuts for new hires might impact teachers’ decisions about where to teach. (Teachers make up more than half of the state and local workforce and are among the most highly paid workers.) They considered public data on teachers’ pay and pensions; they also looked at the average S.A.T. score at a teacher’s undergraduate institution.They found that school districts that pay better—including deferred compensation, such as pensions—generally attract teachers from universities with better S.A.T. scores. Cutting compensation is “not costless,” the authors wrote: “it will almost certainly result in a lower quality of applicants for one of the nation’s most important jobs.”Emperor Augustus’s new pensions were expensive: he paid for them partly out of his own pocket, but also, to the disgruntlement of some subjects, with new taxes. Detroit and other cities should recognize that cutting pensions—unless this is offset by better compensation elsewhere—could also be expensive, in the long run.
This is the go-to argument when any group’s sweetheart deal is imperiled by reform. And when you think about it, it’s really a dodge.One of the main problems with public pensions is that the long time frame gives politicians an incentive to cater to unions by increasing pension benefits, knowing that it will take years for the costs to become apparent. Raising salaries by a similar amount would still be expensive, but it would force cities and states to confront the costs immediately rather than waiting until the bills come due decades later. If politicians are forced to explain to voters why they are raising taxes or cutting services to increase employee salaries, they will be more hesitant to make promises their cities can’t afford. The cost of hiring qualified people to do important jobs cannot be more of these shenanigans. The question of what it would take to retain qualified people is quite separate from the question of how to clean up the system.Moreover, we don’t see the push toward pension reform as a bad thing for public workers, and we certainly don’t wish to see pensions eliminated—we just think they need to be replaced with defined-contribution plans. The key problem with today’s public pensions system isn’t that workers are getting too much per se; it’s that cities have set up their systems in such a way that they are simply unsustainable and unaffordable, which is disastrous for everyone involved. Defined-contribution pensions may be less appealing as a perk than the generous defined-benefit plans many workers currently enjoy, but they’re certainly much better than seeing your benefits slashed at the last minute because your city is broke. Pension reform isn’t just about saving cities money. It’s also about making retirement plans for public workers more secure and reliable.