The political battle under way in Wisconsin has Gov. Scott Walker and Republicans in the Legislature taking on the state's powerful public employee unions. Similar battles have been joined in a number of other states, often focused on the collective bargaining rights of public employees. In Ohio, a bill is pending that would prohibit collective bargaining over pensions.

I've been asked professionally and journalistically whether the public sector's retirement-funding crisis has given anti-union activists a legitimate justification for abolishing public employee unions. My answer is no.

There's no question that the pendulum has swung and the public's mood has shifted to become less supportive of public employees and their compensation. And there's no question that public employee bargaining power has veered out of control in states where these unions can buy off legislators and policymakers to feather their members' nests at public expense. But there's a big difference between reform and abolition. So I think it worthwhile to separate the issues and focus on ways to reform retirement systems that finesse and clarify the collective bargaining debate — which tends to be ideological and partisan and less focused on achieving sustainable reforms.

Needed first: arbitration reform. There is no doubt that the current system of public employee labor laws has failed in states where the unions can "divide and conquer" public employers. Unions can bargain for increased benefits in one jurisdiction and then leverage that feature with other employers, especially in states that compel binding arbitration to resolve impasses. This problem is even worse in states that prohibit reductions in pension benefits once employees are hired. It's the ratchet effect: benefits go up but never down.

Unless arbitrators are required to compare public employee benefits with those offered in the private sector (from which most employees are hired), the rules of the game have become so rigged that it's impossible for public-sector leaders to defend taxpayer interests. So one of the labor law reforms we need to see first is a change in arbitration laws to require consideration of both public and private sector compensation and benefits levels in the labor markets from which public employees are initially recruited. Benefits (and especially retirement benefits) that exceed competitive compensation levels in both labor markets should be prohibited. Below that level, there is no reason that collective bargaining cannot operate reasonably. But, the burden of proof should be on employee groups seeking compensation above-market in the real world and not just a chosen handful of other unionized public employers.

Next: Equal cost-sharing. If public employees are required to share equally in the full costs of their retirement benefits (including actuarial shortfalls for benefits improvements and investment underperformance), then collective bargaining will take on a new face. No longer will employees view retirement benefits as "free money" if they share the cost burdens equally. If employees wish to bargain for benefits enhancements — and pay half the cost — then it's up to public employers to pay closer attention to what they're getting into.

Benefits and compensation caps. The third feature of retirement plan reform, and one that must inform the entire collective bargaining scene, is a regime of finite limits on retirement benefits and total employee compensation. In most states, such limits must apply prospectively and in some cases for new employees only. These should include the following public policies that cannot be negotiated:

  • Total public employee compensation — including salaries, special pay, current benefits and retirement contributions by employers — should never exceed the comparable compensation of workers in the private sector who contribute as taxpayers, again using the prevailing levels for new hires as well as those with comparable experience at the top pay levels.
  • No pension or defined retirement benefit can be increased retroactively. History has shown that retroactive deals create unfunded liabilities and windfall benefits to senior incumbent employees with no value to the taxpayers they serve.
  • No public employee's pension should exceed $100,000 a year, whether it be a municipal manager, school superintendant or an overtime-goosing firefighter. A hard dollar cap, adjusted for the CPI, would prevent the "spiking" abuses that get so much media attention. A reasonable limit would be two times the state's median household income (now about $50,000 nationally), so that a public pensioner cannot receive more than twice the income of a normal taxpaying household. More aggressively, some pension reformers would limit the benefit to not exceed the state's median household income, which would require many more employees to receive a significant portion of their benefits in the form of defined contributions for which they must absorb the market risks.
  • The maximum pension multiplier (a specified percentage times years of service times final compensation) should not exceed 1 perccent when employees also receive Social Security, or 1.5 percent when the employer has chosen to exempt its workers from Social Security. The balance of the retirement plan should then consist of a defined contribution plan, so that investment risks are shared more equally between employers, taxpayers and employees.
  • Early retirees must accept actuarial reductions. Retirement ages for new civilian employees should align with the Social Security system, now age 67, with actuarial reductions for those retiring sooner. For public safety workers, an age requirement of 57 would allow them to accrue 10 years of Social Security credit and become eligible for that benefit even if their public employer does not participate.
  • Retiree health benefits should begin no sooner than the age of Medicare eligibility (65) unless funded by defined contributions. For public safety, age 60 would be a reasonable exception. Dependent benefits should be funded by defined contribution arrangements entirely. Employees desiring such benefits should contribute half the cost during their working years, just like their pensions.

Within these constraints, I see no reason that public employees should not have the right to bargain collectively for retirement benefits and negotiate the trade-offs necessary to determine their compensation packages at the table with public employers. The public's interests can be protected, and local labor markets conditions will be scrutinized far more carefully than they are today, which would probably benefit the taxpayers' interests as well. In most states, a simple statutory change can effect these reforms; in a few, it may require a constitutional amendment to make the limits permanent and ensure a balanced system. In states where the unions have greater sway on the legislature, I would not be surprised to see taxpayer and business groups propose ballot initiatives to achieve these objectives.