The American Interest
Analysis by Walter Russell Mead & Staff
Pension Scam Hits Connecticut

Via Meadia has already discussed the massive pension scam unfolding in Minnesota, but readers in Connecticut can stop gloating — an even bigger pension mess may be heading your way. A recent CBS story reported that Connecticut’s Governor has announced plans to deal with the funding of woefully underfunded state pension plans. The story should be familiar by now: in the plush years of the nineties, state politicians and unions negotiated generous pension deals that would be paid for by hefty payments far down the road.  Any qualms about the cost were hushed up by a simple mathematical trick — assume big enough investment gains and a sick pension looks strong:

Malloy has been critical of the agreements reached between former Republican Gov. John G. Rowland and the state employee union leaders back in 1995 and 1997, which included an early retirement incentive program and allowed the state to defer most of its unfunded pension liability into the future. It required a hefty, one-time payment of $4.5 billion in 2032 to fully fund the pension plan.

Moving to fund the plan now rather than hoping for good times in 2032 is a smart move, but it will come at a heavy price for Connecticut—requiring payments of $125 million for years in the future. Even these payments will only get the funding up to 80%, and that number is likely to fall when new and stricter accounting standards kick in. Once again, state workers would be wise to plan for a retirement where they do not receive their pension benefits in full.

In Connecticut, it was the GOP leadership of the 1990s that pandered to the unions, and the Democrats who are now cleaning up the mess. It took two parties to get us into this mess, and it is going to take some heavy lifting by both parties to clean it up.

One lesson from Connecticut is clear: taxpayer advocates and fiscal conservatives need to organize themselves to speak up forcefully when politicians and union bosses start negotiating.  All too often, these negotiations take place without a lot of public scrutiny or debate; this is how terrible pension deals and unsustainable labor agreements get made. Politicians should learn there’s a downside to sweetheart union contracts.  That will only happen if voters learn to pay attention to these deals.

Published on January 24, 2012 6:49 pm
  • gooch mango

    Well, of course Connecticut’s government worker pensions are in crisis; pretty much all Western pensions are in or entering crisis.

    The concept to keep in mind is this: all pensions are dependent on the earnings of your children and grandchildren. Whether you work in the public sector or private; whether your pension is defined benefit or defined contribution; whether it is funded by pay-as-you-go transfers or accumulated assets… it doesn’t really matter. Your pension checks are built upon the numbers and prosperity of your descendents. All of the promises and pieces of paper in these plans are just proxies; claims on a portion of the labor of future generations. If the future generations are smaller and/or poorer, the money simply won’t be there.

    In fact, most of these pension plans collapse in the absence of growth — simply holding-our-own is enough to push most of them over the edge.

    Retirees can rant and rave, they can rend their clothes and gnash their teeth, they can weep and wave their contracts in the air… in the end it won’t matter. The money won’t be there, and all of the paper laws of man will fall before the iron laws of math. Simple as that.

  • Johnny

    @Gooch Mango

    You can’t be more wrong as to defined contribution plans. Both your contributions and the states go into individual accounts. When you retire you take what’s in your account. It’s not dependent on future contributions.

  • LarryD

    And where does the money go? It’s invested, i.e., lent to younger people to create wealth. No wealth creation, no growth. No young, no growth, no survival, eventually.

    No, Gooch hits it on the nail head.

  • Richard Treitel

    To be strictly accurate: the money may be there, but the things you hoped you could buy with your money will either not be there, or its price will have inflated beyond your wildest nightmares.

    This was clear long ago to anyone who didn’t think of money (or gold) as a special sacred thing whose value cannot change in response to supply and demand. When the baby boomer retirees try to exchange their money for medical care, whether the money be in the form of government bonds or gold bars or anything else, the high demand for medical care will drive its price up and the low demand for money will drive its value down. No escape and no excuses, please!