Pension Funds On That Slippery Slope Downward

Federal and military retirement pensions would be the primary casualties of the two-year budget agreement that is expected to pass the Senate this week. (The House passed it overwhelmingly; the entire Pennsylvania delegation gave it a thumbs-up.)

In the compromise deal crafted by Sen. Patricia Murray (D-WA) and Rep. Paul Ryan (R-WI), federal government workers hired after January 1 would pay 4.4 percent of their pay toward retirement, an increase of 1.3 percent. Those hired during the year 2013 would pay 3.1 percent. The higher contributions would save the government $6 billion over 10 years.

On the military side, the budget agreement would slash cost-of-living adjustments for working-age military retirees by one percent. The Veterans of Foreign Wars (VFW) estimates that an enlisted person who retires at age 40 would lose $80,000 by the time he or she reaches the age of 62.

The agreement, while hailed as a bi-partisan achievement, points to an unmistakable trend: pension funds have become prime targets in the never-ending quest to lower budgets in all walks of life. And wouldn't you know who's leading the charge.

Whether it has to do with ideology or with pleasing their Wall Street patrons, there's a certain conservative narrative on the march that holds that a) public employee pensions are a risk to state and local budgets, b) nationwide, public pensions are underfunded by billions of dollars, and c) public employee pensions are much more generous that those paid in the private sector. And for every serious-sounding conservative narrative, there appears an interest group or two, cloaked in silk-suited respectability, that offer familiar remedies that entice at first glance.

ALEC Comes Calling

The American Legislative Exchange Council (ALEC) has jumped into the pension fund fray by making its diminishing a top 2014 legislative priority. ALEC is offering its "model policies" to sympathetic state legislators that would convert public pension funds from "defined benefit" plans to "defined contribution" plans. Definitions will help, culled from Wikipedia:

• a defined benefit plan "calculates benefits using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan.
• a defined contribution plan accrues benefits "solely attributable to contributions made into the account and investment gains on those funds, less any losses or expense charges. The contributions are invested (e.g. in the stock market) and the returns on the investment are credited or deducted from the individual's account." Similar to a 401(k) or IRA, there are no guarantees on the amount of that monthly check.

The results have been mixed, to put it generously. Alaska and Michigan converted to defined contribution plans and saw their pension fund deficits increase, according to the National Pension Fund Coalition. In Rhode island, costs were escalated so much by fees to money-managers that even Forbes Magazine called it "just blatant Wall Street gorging."

West Virginia converted to a defined contribution plan in 1991, but switched back in 2006, according to the book The Plot Against Pensions, when it found that "public employees had such low incomes in retirement that they were eligible for means-tested public programs [like food stamps], driving up costs to the state."

Public Pension funds do face an annual shortfall of about $46 billion. That seems to be the battle-cry of a partnership of the Pew Charitable Trusts' Retirement Systems Project and the Laura and John Arnold Foundation. This partnership has been working in tandem throughout the country to sound the alarm of an imminent pension fund crisis: $46 billion deficit! A 30-year shortfall of $1.38 trillion! That's a lot of zeros for a state legislator to digest. John Arnold, by the way, has some experience in slashing pensions funds. The billionaire conservative activist was an executive with the infamous Texas oil company Enron, which went bankrupt over 10 years ago over a massive scheme of "cooking the books." The collapse of Enron decimated the pension funds of its workers.

Local Governments' Desperate Dilemma

The pension fund deficit is a reality that state and local governments cannot shrink from. Budget have to be balanced. With the conservative echo machine blaring daily, public pension funds have become easy targets, as states compete with other states, cities compete with towns and surrounding suburbs, with competition reaching across oceans and continents...all to lure companies to their localities, with the promise of jobs and an expanding tax base. This is not without consequences.

A New York Times investigation revealed that states, counties and cities are giving away more than $80 billion to companies in the form of subsidies and tax breaks. These incentives come in many forms, according to the Times: "cash grants and loans, sales tax breaks, income tax credits and exemptions; free services; and property tax abatements." It all adds up to $80 billion annually. Remember the $46 billion pension fund shortfall? I'll let you do the math.

The siren's call to cut state employee pensions seems to have carried the day in Illinois. After a bitter legislative battle, Illinois recently cut cost-of-living increases, created an optional defined contribution plan, and raised the retirement age of younger workers by as many as five years. According to the Huffington Post, "All [Illinois public employees] had faithfully made their required contributions to the state's pension fund for years, even though the legislature failed to make the required payments so it could avoid raising taxes on the state's wealthiest citizens."

At least Illinois public employees would have some kind of retirement benefits. While Detroit's bankruptcy made headlines throughout the country, lost in all the "I told you so" commentary was a court ruling that Detroit's $3.5 billion pension obligation was "in bankruptcy" under the state constitution. As this story unfolds, there's no restful sleep for the Detroit police officer or sanitation worker approaching retirement.

Nor for workers in the private sector. Increasingly for them, pensions are becoming relics of another age. The Bureau of Labor Statistics sounded the news: Only 18 percent of all private sector workers enjoy some kind of pension, down from 35 percent in the early 1990s. But there is a bright side to this, which could point to the way forward.

The BLS study revealed that unionization was the key factor in securing retirement benefits. "Pension coverage is much higher in the public sector (78 percent) and among unionized workers (67 percent) in the private sector. In contrast only 13 percent of non-union private-sector workers are covered," according to the study.

The covenant that guaranteed a secure retirement for all workers was shattered long ago (if it indeed ever existed). Gains by unions and progressive leaders have been, at best, incremental. In the end, there's a lesson for every state and local public employee, and for workers everywhere: Fight for what's yours.