The Pension Hammer
In this issue’s profile of John Arnold, the billionaire philanthropist who has become obsessed with public employee pensions, reporter Liz Farmer writes that he is “a mathematics whiz whose remarkable skill with numbers” is the basis of his fortune. Frankly, though, you don’t have to be a math genius to understand the unsustainability of public pensions. Under the status quo, we’re ultimately headed for insolvency, even for well-managed plans. That’s because the big number that swamps all others is the ratio of active public employees to retirees. It has declined from more than 7-to-1 in the 1950s to less than 2-to-1 today.
Pensions have three sources of funds: employer contributions, employee contributions and returns on investments. For elected officials, it is very difficult to increase employer contributions -- taxpayer money -- without cutting services or raising taxes. Therefore, as employee contributions have declined as a percentage of pensions’ revenues, the funds have chased higher market returns, at the cost of significantly higher risk. This can only end in tears: If you roll the dice enough times you will eventually come up snake eyes.
It’s hard to overestimate the threat this situation poses for public employee unions. They are going to have to confront the fact that their members’ pensions, as currently structured, are not only mathematically unsustainable but also politically unsustainable. There is a broader and growing retirement crisis in America. The millions of folks who have no pensions or savings for retirement are going to have very little sympathy for public employees whose pensions look very good in comparison to what these taxpayers have to live on. It’s a hammer that unions’ opponents can use to smash them.
For decades, the country has been having an extended debate over access to health care and health insurance. I think that in a very few years we will come to understand that retirement security is an even bigger and more complicated issue. And we will discover that, as with health insurance, we probably need a national framework for pensions and retirement security. Leaving it to individual governments to deal with on their own won’t work now or down the road.
In her story, Farmer writes that while Arnold may be all the vile things that his opponents, particularly in the public-sector unions, claim he is, John Arnold just may represent something else entirely: public pensions’ best shot at survival. I think that’s right, and I hope he soon turns his full attention to the broader retirement crisis.