Nasty Battle Looms Over Public Sector Pensions

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24 August 2010. By David Caploe PhD, Chief Political Economist

Of the many fault lines that the Black September 2008 crisis and its aftermath have exposed in the “developed” world,

perhaps the most difficult is the relation between the public and public sector employees.

Many of us can immediately recall encounters with “public servants”

in which we felt more like slaves, let alone servants or masters, as Depeche Mode might say.


24 August 2010. By David Caploe PhD, Chief Political Economist

Of the many fault lines that the Black September 2008 crisis and its aftermath have exposed in the “developed” world,

perhaps the most difficult is the relation between the public and public sector employees.

Many of us can immediately recall encounters with “public servants”

in which we felt more like slaves, let alone servants or masters, as Depeche Mode might say.

So it’s with no small degree of anger that many people react to

the simultaneous exposure of both their own vulnerability to unemployment and disappearing pensions,

and the fact that not only are public employees basically life-tenured,

but are also often granted generous pensions

that represent no small measure of the so-called sovereign debt load being borne by governments,

the problems with which have called into being the austerity measures that have hit entire societies so hard,

as we have pointed out with regard to several, most notably Ireland.

To be sure, those pensions are hardly the only component of sovereign debt.

But the combination of the bad experience many people have had with public employees AND

the fact that they are insured both life-time employment

plus relatively cushy pensions that have not technically gone up in smoke,

as with Enron or any other number of private employers,

but are being paid for by the very same taxpayers who feel they have been insulted by public sector workers,

means the battle over public sector pensions is likely to be an ugly one.

Indeed, some go so far as to characterize it as a “class war.”

The seem-to-be haves are retirees who were once state or municipal workers.

Their seemingly guaranteed and monthly pension benefits appear to be breaking budgets nationwide.

The seem-to-be-have-nots are taxpayers who don’t have generous pensions.

Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed.

And soon, many of those people will be paying higher taxes or getting fewer state services

as their states put more money aside to cover those pension checks.

At stake is at least $1 trillion.

The figure comes from a study by the Pew Center on the States that came out in February.

Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers –

in the way of retiree pension, health care and other benefits –

and the money they currently had to pay for it all.

And some economists – there they are again – say Pew is too conservative,

and the problem is in fact two or three times as large.

So a question of extraordinary financial, political, legal and moral complexity emerges:

Given how wrong past pension projections were,

who should pay to fill the 13-figure financing gap?

But it’s even more complicated than that.

Why ???

Because the American “dominant myth” [ see Lectures 8 – 13 ]

that private is always better than public

meant the PUBLIC pension funds that were supposed to cover these pensions

invested almost all their money in PRIVATE companies.

And, unfortunately, as we now know, MANY of these PRIVATE companies –

on whom the PUBLIC employees were depending, to generate the money on which they were going to retire –

were, shall we say, not too well run in the first place, despite the assurances of the credit rating agencies,  

and went under during the run-up to, and aftermath of, Black September 2008.

In that sense, the public pension funds were, in fact, dependent on what happened in the private sector.

And there’s another significant aspect here that most Americans, let alone others, don’t know:

Public employees are forbidden BY LAW from paying into Social Security –

which means the pensions they receive from the government are

the ONLY legally insured retirement money to which they have access.

So what appears to be shaping up is one of those tragic battles of right vs. right:

public employees who were dependent on private companies as the ONLY sources of

money to insure their retirement at a previously agreed-upon rate

vs. a public whose own economic present and futures are in grave doubt

and whose experience with at least some public servants has often been less than pleasant.

In this context, consider what’s going on in Colorado —

and what is likely to unfold in other states and municipalities around the country.

Earlier this year, a bipartisan coalition of state legislators passed a pension overhaul bill.

Among other things, the bill reduced the raise that people who are already retired get in their pension checks each year.

This was apparently the first time that state legislators had forced current retirees to share the pain.

In Colorado, though, some retirees and those eligible to retire found this solution

a violation of what they thought were legally-insured promises.

So they sued the state to keep all of the annual cost-of-living increases

they thought they would be getting in perpetuity.

The state’s case turns, in part, on whether it is an “actuarial necessity” for the Legislature to make a change.

To Meredith Williams, executive director of the Public Employees’ Retirement Association, the state’s pension fund,

the answer is pretty simple.

“If something didn’t change, we would have run out of money in the foreseeable future,” he said.

“So no one would have been paid anything.”

Meanwhile, Gary R. Justus, a former teacher,

who is one of the lead plaintiffs in the case against the state,

asks taxpayers in Colorado and elsewhere to consider an ethical question:

Why is the state so quick to break its promises?

After all, he and others like him served their neighbors dutifully for decades.

And along the way, state employees made big decisions, and built lifelong financial plans,

based on retiring with a full pension that was promised to them in a contract

they say has the force of the state and federal constitutions standing behind it.

To them it is deferred compensation,

and taking it away is akin to not paying a contractor for paving state highways.

And actuarial necessity or not, Mr. Justus said he didn’t believe

he should be responsible for past pension underfunding

and the foolish risks that pension managers made with his money long after he retired in 2003.

Stephen Pincus, a lawyer for the retirees who have filed suit,

estimates that the change will cost pensioners with 30 years of service

an average of $165,000 each over the next 20 years.

Mr. Justus, 62, who taught math for 29 years in the Denver public schools,

says he thinks it could cost him half a million dollars if he lives another 30 years.

He also notes that just about all state workers in Colorado

do not (and cannot) pay into Social Security,

so the pension is all retirees have to live on unless they have other savings.

No one disputes these figures.

Instead, they apologize.

“All I can say is that I am sorry,”

said Brandon Shaffer, a Democrat, the president of the Colorado State Senate,

who helped lead the bipartisan coalition that pushed through the changes.

He also had to break the news to his mom, a retired teacher.

“I am tremendously sympathetic.

But as a steward of the public trust, this is what we had to do to preserve the retirement fund.”

Taxpayers, whose payments are also helping to restock Colorado’s pension fund, may not be as sympathetic, though.

The average retiree in the fund stopped working at the sprightly age of 58 and deposits a check for $2,883 each month.

Many of them also got a 3.5 percent annual raise, no matter what inflation was, until the rules changed this year.

Private sector retirees who want their own monthly $2,883 check for life,

complete with inflation adjustments,

would need an immediate fixed annuity if they don’t have a pension.

A 58-year-old male shopping for one from an A-rated insurance company

would have to hand over a minimum of $860,000,

according to Craig Hemke of, cited in this article in the New York Times.

A woman would need at least $928,000, because of her longer life expectancy.

Who among aspiring retirees has a nest egg that size,

let alone people with the same moderate earning history as many state employees?

And who wants to pay to top off someone else’s pile of money

via increased income taxes or a radical decline in state services?

So here’s yet another structural problem, one going on not just in the US, but in Europe as well,

that has almost the same explosive potential as derivatives:

who is going to pay for the mistakes made by the credit rating agencies /

the greed of the TBTF banks, whose leaders often sat on the boards of government pension funds,

and had influence over their investment decisions /

and the politicians, from Presidents on down, who assured the country everything was just fine ???

It doesn’t seem any of them are going to pay,

so it’s left to two groups – who aren’t in that different positions –

to fight it out between themselves:

a public rightly worried about their own economic situations, both present and future;

and public employees, who, whatever their flaws,

had no say at all in the decisions that determine how they would live in their retirement years.

It’s an ugly reality, and it’s not going away any time soon.


David Caploe PhD


President /


About David Caploe PRO INVESTOR

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.