Will Public Pensions Go the Way of Private Pensions?
Tuesday, May 11th, 2010
Loading ...Way back when.
Isn’t that how most stories begin? It appears that virtually everything that is going on today is a result of something that occurred “way back when.” Last week’s trilogy blog focused on that point.
Public pensions will shortly bankrupt many states unless draconian actions are taken now. Unlike the federal government, states cannot print money to pay off debt or even have unsecured debt on their books. How did we get to this point?
Way back when.
In the first 50 years of the last century (1900-1950), life expectancy never reached past 65. Social security didn’t start until 1935 and even then, benefits took years to make a difference (first payments were less than $1.00 annually).
The employer/employee relationship was mostly harmonious and employees worked for the same employer in many cases for life. Pensions were created to take care of loyal employees when they retired since there weren’t any other options. At the same time, public unions came into existence and they made sure they had at least the same level of benefits as the private sector.
That was way back when.
The second 50 years as you read last week proved to be quite different. Women entered the workplace in droves, the computer was introduced and the employer/employee relationship changed. IBM no longer offered its employees employment for life. People changed jobs. The idea behind the pension withered and made no sense.
As companies foresaw this, so did the government. To supplement Social Security, they passed in 1978 the 401(k) plan which allowed private citizens to invest a portion of their income pre-tax each year. The introduction of the 401(k) plan virtually eliminated pension plans over the next few years.
But that didn’t deter the public unions. They fought successfully to keep their pensions and not be bothered with “contribution” plans. The same was true with health care.
When workers were young, state’s employment numbers kept growing, as did the state’s accumulated surpluses in their treasury accounts. No one paid attention since there was no reason to. As states gathered more revenue, pensions became even fatter.
That was way back when.
Now the day of reckoning is coming and coming fast. States employment numbers are dropping and workers aren’t getting younger, in fact, they are retiring more than ever in the history of the USA. Public workers expect their pensions and health care for life. The problem is life expectancy is no longer 65 but 79 and rising. That is 14 more years of paying pensions and health care the state’s did not consider “way back when.”
So who is going to pay for this now? And that my friends is today’s $100 question. Stay tuned.
Happy Tuesday!
