Motown Blues

By John Lumbard.

“Addressing a lunchtime rally of more than 6,000 state workers in front of the State House Annex on Monday, [New Jersey Governor] Corzine pumped his fists and vowed to keep his pledge to increase the pension contributions. ”I will fight for you,” Corzine told the crowd, made up largely of members of several municipal unions.”

 —  The New York Times, explaining that instead of negotiating with his employees—workers who had contributed to his election campaign—then-governor Corzine was proposing a New Jersey sales tax increase from 6% to 7%.  Buying votes with taxpayer dollars . . . Corzine, who was recently charged with the misuse of nearly $1,000,000,000 in customer funds at MF Global, also served as a U.S. senator.  And, wouldn’t you know it, before all that he was the chairman and CEO of . . . Goldman Sachs.

All over the nation, for decades, politicians have been buying votes by giving special treatment to the unionized public employees who work for them.  Payment for re-election was usually purchased with generous retirement benefits, because the bill wouldn’t come due for years . . . The worst stories of abuse seem to come from California (which is already paying pensions larger than $100,000/year to twenty thousand public-sector retirees), but the precedents will be set in bankrupt Detroit.

Detroit entered its downward spiral decades ago, when the Big 3 auto makers began to give up great chunks of market share because of dysfunctional and arrogant management, and assembly lines that were snarled in union rules.  In the end the management was kicked out, but the unions had enough political power to subvert the bankruptcy process and steal a chunk of GM from the bondholders.  And the city of Detroit continued to be snarled by union rules and bureaucracy so severe that its agencies couldn’t fire anyone, couldn’t get workers to show up for shifts, had to lay out huge sums for overtime, and couldn’t stop workers from going out on permanent disability without examination.

Impossible retirement promises have been made at every level of government.  In the late 1980s a union-dominated retirement board in Providence, RI, established a 6% annual cost-of-living increase that remains to this day—hugely benefitting a fire chief who served for little more than a year in the early 1990s and retired at 55.  He was paid for not working throughout the Nineties, and now receives more than $200,000 a year.  According to WPRI Eyewitness News, if he lives to 89 those 6% raises will push his annual payout to $419,781.

Then there’s “spiking”.  The chief executive of Ventura County, CA, cashed in $69,000 of holiday time and other benefits to fatten up her pay of $228,000 in her last year of work.  The last year was all that mattered;  her pension was set at $272,000.

How about a double dip?  California’s Little Hoover Commission cited the case of a fire chief who retired in 2009 with a final salary of salary of $185,000.  According to The Economist he was able to draw a pension of $241,000 even after he was hired back as a consultant at $176,000 a year.

Very few private sector workers—the people who pay the taxes—now retire in anywhere near the comfort of the public-sector workers who work for them.  The best data is for federal workers;  in 2010 the average private sector salary was $51,986 (with $10,771 in benefits) while the average federal employee earned $83,679 (with $42,462 in benefits!).

Federal employment generally demands better educational credentials.  But the Bureau of Labor Statistics also offers 2008 statistics for comparable jobs;  the private-sector workers averaged $60,046 with $9,882 in benefits, while the federal workers averaged $67,691 with health, pension and other benefits—invulnerable to stock-market crashes—that averaged $40,785.

That annual gift of benefits grows and compounds over time.  In contrast, Boston College researchers say that the typical household accumulates an average of $120,000 in savings as retirement approaches.  If you apply the usual 4% “safe withdrawal rate”, that’s an income of just $4,800 per year.  And it’s not hard at all to find entrepreneurs—the people we most need to encourage—who emptied out their retirement accounts to make payroll during hard times, and now have little chance of catching up.

A pension plan that pays out $40,000 a year, guaranteed, with an annual inflation adjustment, is worth far more than a million dollars.

The hidden pot of gold is also enjoyed by state and local employees, teachers, paving crews who are unionized by federal law, and the employees of the hospitals and universities that now hire lobbyists to ensure a steady flow of federal funding.

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“The pension crisis is no longer around the corner.  It has arrived at our schools.”

Rahm Emanuel, mayor of Chicago (and former White House Chief of Staff), after laying off 2,100 teachers because of a $400 million increase in teacher pension payments.

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So what’s going to happen to Detroit?  The court handling the bankruptcy will divvy up the losses and pain among bondholders and creditors, who include the city’s retirees.  The decisions made by the court will set a pattern for municipalities across the nation that are sliding towards bankruptcy, and every other state, city, and hamlet will look closely at its future promises—slashing benefits for new hires and bargaining far harder with existing employees.

There will be crippling strikes in some locations.  But the job losses will mostly be confined to the political class.

 

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