The Public Pension Backlash

This was bound to happen - in fact you might wonder why it's taken so long. The move from traditional pensions to 401ks began over twenty years ago in the private sector while most public employees have retained their defined benefit plans to this day.

Back in the roaring nineties, when company stock was overflowing in selected individual retirement accounts, making millionaires of some lucky hourly employees, private sector workers gloated while those toiling for the government felt left behind.

Now the tables have turned.

Private sector workers, disappointed at the performance of their stock portfolios and fearful of calculating how much it may yield when the time comes to start drawing it down - these workers are now protesting the high taxes required to support the guaranteed income of those they thought they had passed by in the last decade.

This story from the LA Times tells of Steve Adams and a group in New Jersey who have had it with the high taxes required to fund the high cost of government pensions.

Public employee pensions, one of the last bastions of guaranteed retirement plans in America, are under assault as cash-strapped state and local governments struggle to cover rising costs and as resentful taxpayers refuse to pay more to cover them.

The development has led to "pension envy" among people like Adams, as baby boomers struggling to make it to retirement see state workers retire early to reap rewards they may never enjoy. The tension has crept into relationships between friends, neighbors, parents and teachers.

Well, the people in New Jersey should see what's been going on in San Diego. Now that house prices are in retreat, there may be a growing chorus of protestors envious of the city's generous (some would say illegal) pension deals.

Adding to the drama for retirees on both coasts is the exposure that the state of New Jersey and the city of San Diego had to the world's favorite hedge fund du jour - Amaranth Advisors.

Things will probably get worse before they get better regarding the current pension imbalance. Most mid-career workers with 401ks have no idea what's about to hit them, and as evidenced by last year's failed attempt to reform the California state retirement system, changes to public pensions will come grudgingly.

In an eye-opening look into the state of defined contribution retirement plans a short time ago, the speaker before a group of fifty-year olds at a small retirement information and planning session was heard to say, "I have some bad news for everyone in the room".

It's hard to imagine that the same words might be someday spoken to fifty year olds expecting to start collecting government pensions, but you can't keep raising taxes forever.

About 90% of state and local workers in the U.S. have pensions, compared with about 20% of private-sector workers, said Keith Brainard, research director at the National Assn. of State Retirement Administrators.

Instead of company-paid pensions with guaranteed payments, most private-sector workers now are offered 401(k) plans, investment accounts that employees pay into and manage while they're working, then tap when they retire. Some employers contribute to 401(k) plans.

With state pensions, investment management is up to the state, but taxpayers are often called on to cover costs. As of last year, 84% of state pension plans were underfunded, meaning their assets don't cover projected payments, according to Santa Monica-based Wilshire Associates. Some lawmakers plan to make up the difference by raising taxes.

The tension between public employees and taxpayers is playing out across the country, but nowhere more sharply than in New Jersey.

Several of New Jersey's major private employers recently eliminated pensions. Telecom giants Sprint Nextel Corp. and Verizon Communications partially froze pensions last year, affecting some 18,000 workers in New Jersey. DuPont Co., which employs about 1,300 in New Jersey, announced plans this summer to freeze pensions, meaning the company intends to drastically reduce its pension fund for current employees and deny any coverage to new hires.

"More and more New Jerseyans find themselves without pensions and become resentful of the double whammy that they face: fewer benefits for themselves and higher taxes so that the public-sector workers can receive generous benefits," said David Rebovich, managing director of the Institute for New Jersey Politics at Rider University in Lawrenceville.

It's already starting to get ugly, and understandably so.

Very few workers take retirement planning very seriously - the nice thing about defined benefit pensions is that someone else does all the work for you. All you do is complain about how much money gets taken out every week and then when you retire you complain about how little you get every month.

With a 401k you put off contributing until you're so far behind that you'll never catch up, and then you just resign yourself to working for the rest of your natural life.

With two retired parents receiving checks from the state of Pennsylvania, just across the Delaware River from these folks in New Jersey, it's easy to side with the pensioners, but you can't help but wonder where the money is going to come from in the years ahead - you can't keep raising taxes forever.

Public employees say resentful taxpayers should instead defend private-sector benefits, which continue to erode.

"Private-sector workers, who should be angry as hell at their employers for walking away from pensions, are angry at public employees," said Jon Shure, president of New Jersey Policy Perspective, a nonpartisan Trenton think tank.

He said eliminating state pensions would feed further cuts in the private sector, leaving all workers with less for retirement. "If the people who are fomenting this have their way, public benefits will stink too and we'll have dumbed it down to the way it is in the private sector," Shure said. "If anything, the public sector should set an example for how benefits should be."

Well, Mr. Shure's view is not likely to be very popular with those in the private sector - there are powerful market forces at work there making these kinds of changes near impossible. Globalization anyone? The effects of these market forces have already been seen in wages in recent years, where public workers are now coming out ahead too.

In New Jersey, state workers already make more than private sector workers - $54,742 to $43,979, on average. For them to have a more generous retirement plan and little fear that their job will be outsourced to India doesn't seem completely fair.

Lower pay while working used to be the price that was paid by public employees in return for golden years that were more secure. This had the added benefit of reigning in spending during a long career, learning to do with less when compared to their private sector counterparts.

Come retirement time, it's a snap. Thirty years of service goes into a relatively simple formula that has the new-retiree pulling down 75 percent of their salary starting at age 54 (or something like that). They never knew retirment planning could be so easy.

Meanwhile private sector worker become used to spending more and saving less, and they wind up in their fifties, attending a retirement planning seminar where some guy tells them, "I've got some bad news for every one in the room".

At the moment, the nation's retirement system favors public employees over those in the private sector by a wide margin. But, ultimately changes will have to put the two groups of retirees on a more equal footing - you can't keep raising taxes forever.