David Cay Johnston, the Pulitzer-prize winning tax-beat reporter now writing for Tax.com, finds the idea of making state workers “contribute” to their pensions to be nonsensical:
Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers.
How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
What
My apologies for misspelling your name Joe. A lesson in editing before pushing
Peter, as long as you are willing to read a long post and put up a thoughtful comment, spell my name however you like!
As to the substance — I think the extreme actions that the Wisconsin senate minority is willing to take attest to the influence of the public employee unions. Few constituencies could hope to get that sort of loyalty from elected officials. It would be surprising if a constituency with that much influence didn’t use that influence for its own ends, even though such ends are not necessarily in the interests of the taxpayers who pay the bills.
Despite the fact that public employee unions share with private corporations the legal right to help fund the political campaigns of candidates that support their interests I doubt that the political clout of unions, public or private, is even in the same solar system with the power of corporations to influence the actions of public officials – especially that of banks.
For example, let’s compare the paltry gains of public employees due to collective barganing with the “extreme actions” taken by the Fed to bail-out private Wall Street banks and hedge funds with 13 trillion dollars of public tax money after the actions of these banks caused the collapse of the entire world financial system, a collapse that has been the indirect cause of many of the state budget “crises” that have fuled tendentious attacks on public workers. This dispersal of public funds was taken without our political representatives deigning to impose any restrictions on how the money was to be spent or any greater regulations over captial reserve requirements for speculative investments, let alone seizing these bankrupt institutions and constructing a public banking sphere to compensate the taxpayers. Fifteen million people lost their jobs, and many lost their life savings and will be losing their homes for the next 9 years due to the backlog of forclosed homes – all this to support the “private” dividends, bonuses and compensation pagackages of 1/10th of 1% of the population.
I don’t know about you, but if we’re going to talk about an imbalance between private gain and the public interest I think we need to start the conversation right here.
Peter:
You seem to have a fundamental misunderstanding of the issues here:
“Working class people need protection from big business which gets its friends elected to provide tax breaks”
It’s not “unions” and it’s not “working class:” it’s the “protected class” status of public sector unions that is at the root of this problem.
In *normal* business negotiations, management and labor are, in fact, engaged in a very real, very adversarial battle: labor wants more, management (which pays the bills) wants less. Understandable.
But the public sector unions and their employers are not, in fact, on opposite sides of the table: “management” has no particular skin in the game (after all, it’s not *their* money, it’s the taxpayers).
And it gets worse: all the money wrested by the unions (“labor”) in this scenario gets paid back to the folks on the other side of the table (other government workers in the guise of “management”). The reality is that *both* “sides” have an incentive to increase costs (“benefits”).
Pretty simple, really.
Yo
BTW, all of the aboove appl;ies equally to Mr Riehle’s “analysis,” as well.
(And I have NO idea where that “Yo” came from)
Joe,
The Wisconsin pension plan is fully funded. So your first point is not valid as it applies to Wisconsin.
In other states it was MANAGEMENT that did not make the necessary contributions. Remember Christie Whitman, whose not putting money in will cost taxpayers there a fortune now that she is out of office? In most places where the elected officials who are management did not put in enough money the unions screamed, but to no avail.
And DB plans save taxpayers money. To get the same income flow from a DC plan requires people to demand much more money because each must individually reserve for a very long life even though many will die soon after retiring.
A DB plan takes advantage of the law of large numbers and requires a reserve for the actuarial life expectancy of the pool plus a very small margin.
In addition, DC plans violate the basic tenet of specialization. As my column at tax.com explains, to expect janitors or cops or teachers to manage money with the same skill and get the same results as professional money managers is nuts. Heck, why not have people diagnose what ails them? Who needs doctors?
David, I was wondering when you’d stop by.
When you say “fully funded,” again, it depends on a lot of assumptions. It’s unwise to trust politicians who have every incentive to fudge to be honest. You are correct that Wisconsin is better off than most states, and I have removed my reference to Wisconsin having a serious deficiency.
As far as defined contribution vs. defined benefit plans, you are using the term “defined contribution” to mean “self-directed.” While defined contribution plans can be self-directed — as with most 401(k) arrangements — they aren’t required to be.
The wisdom of having plan participants invest their own funds may be debatable, but many of us would prefer to make our own decisions, rather than leaving them with the financial wizards running, say, Lehman Bros., CALPERS, or the Teamsters.
As to whether DB plans “save money,” the flight of the private sector from them indicates that they don’t. It’s clearly more expensive to maintain a DB plan than a DC plan, for any level of funding. If they saved money, business owners would embrace DB plans.
Joe, the decline of DB plans does not in anyway disprove my thesis.
1. DB plans are treated as corporate assets, unlike 401(k)-type plans, and is a serious policy error.
2. As I showed way back in 1995, the Democrats disconnected the interests of executives from janitors with their rightening of pension rules, a problem compounded by exploding CEO pay. If DB plans were required to be even across the board (as GWBush said, what’s fair on the executive floor should be on the shop floor) then a CEO would have an equal interest as a janitor or clerk in a DB plan.
3. You ignored the reserve requirement, which makes DB plans inherently more efficient because you can reserve only for the actuarial life expectancy of a large group, whereas self insurance requires saving for a long lifespan even if you die soon after retirement. This is a form of insurance and there is no capitalism without insurance, though in this case it is optional and more efficient, not necessary.
4. DC plans discourage workers from retiring because each year adds to their balance and reduces the time on which they must depend on that balance. Just ask employers who found this exact problem and had to find coercive, but not quite illegal, ways to get older people to leave.
Misguided government policies do not undo economic principles, they just interfere with them.