Friday, February 25, 2011

Pensions and Unions

Mike Smitka
The brouhaha in Wisconsin is confusing issues. Whatever the merits of unions, changing their status will not alter the budgetary problems of state and local governments.
Of course one cause is the lingering Great Recession. Governments cannot readily trim services -- the number of teachers and firemen and police are a function of population -- but things are tight for the time being. Enhancing revenues is more challenging politically than in normal times. Unlike the Federal government, state and local governments can't borrow, either, so they can't wait until incomes rise and taxes return to normal.
That's a short-term problem. We hope. There is however a serious long-term problem: Americans live long enough to retire. The baby boomers are at that point now, while their immediate predecessors seem to be in no hurry to die. However, state and local governments began promising pensions and healthcare a long time ago; in New York it was written into the state constitution in 1939.
I don't know the origins of that; at the time, however, people didn't live long and healthcare was cheap, so I don't think there was anything nefarious. But over time the deal shifted: improving pensions was used in lieu of higher pay and higher taxes.
In other words, the predecessors to today's politicians tried to do things on the cheap. For example, as the pay for college graduates rose, it became more expensive to recruit teachers. Local governments tried to finesse that: we won't pay you very well, but we'll let you retire with a pension. Perhaps in some cases municipal employee unions struck unusually good deals for themselves. Again, however, that was only possible because politicians thought they could get away with promises that current taxpayers wouldn't have to fund. By and large, voters winked at that game -- let the next generation pay.
We're the next generation.
Will breaking unions make any difference? No.
You can't change a pension agreement retroactively. Indeed, in general even bankruptcy won't help: pensions take priority over bondholders and often current employees. For that matter, there is no legal mechanism by which a state can declare bankruptcy--that's not part of the US Constitution.
I don't have the patience to listen to the rhetoric in Wisconsin. It seems however that either the politicians there can't do arithmetic, or can't take the heat. Workers have to be paid -- retired ones, anyway. And when push comes to shove I am willing to lay a bet that the Tea Party can't actually find much to cut in the budget. Should Wisconsin stop funding snow removal and leave the spring's potholes to grow? [To any southerners out there: when water freezes, it expands: winter potholes are a fact of life there.] End all support for education? Fire police, stop funding fire departments? Some of that will happen. Will it make Wisconsin a better place to live? I wonder. But it won't change the obligation to pay pensions and healthcare to their retirees.