He did nothing illegal. At 44,
Hugo
Tassone retired from the
Yonkers
police force with an annual pension of $101,333 - thanks to overtime
pay he tacked on to his $74,000 salary. Tassone told
The New York Times it was the pension he could collect after 20
years of service that attracted him to the job in the first place.
He’s not alone. In the last decade, half of the police and
firefighters who retired in Yonkers collected pensions that exceeded
their base pay, in (at least one case) by as much as 75%.
Don’t blame the officers. New York’s pension rules make it pay more
to retire than to work. And the horrible habits here are a window on
a national pension picture that’s looking more disastrous by the
day.
Tacking on overtime is only one of a long list of union-won perks
behind New York’s rising pension burden. To dodge a federal law
capping public pensions to $195,000 a year, in 1997,
Albany
created a second fund for "excess benefits." Twenty-eight New York
employees, nearly all teachers, exploited the loophole, leaving
taxpayers with a $6 million check this year alone.
These and other sweeteners are part of the reason why the city’s
annual pension payout has increased 900% since 2000. And that’s
before health care benefits are included. For every dollar police
officers contribute to their retirement, taxpayers contribute nine.
Mayor Bloomberg’s office warns that if one thing pushes
New York
City into bankruptcy again - 35 years after the last time - it
will be pensions.
As Gov.
Paterson pins budgetary balance partly on more federal money,
and lawmakers throughout the state struggle to balance the books,
they have no further to look than their own legislative records for
the cause of New York’s growing fiscal stress. What is perfectly
legal in New York’s pension systems is also not fiscally
sustainable.
For years, unions have succeeded in enhancing pension formulas while
incentivizing workers to maximize their pension payouts. Called
"spiking," "padding" or "boosting and tacking," the strategy of
adding "extras" to the final salary in order to nab a higher pension
has driven New York’s
Metropolitan Transit Authority into a budget crisis. The
Authority has tried to tackle its $400 million shortfall by cutting
bus and rail service. Riders now get to pay the price for years of
transit payroll abuse.
Riddled throughout New York’s pension systems, pension padding is
now the subject of an investigation by
Attorney
General Andrew Cuomo. His office finds that if only 5% of new
hires continue the practice, taxpayers will be saddled with another
$300 million over the next 20 years.
But loopholes and gamesmanship aren’t the only reason why public
pension systems nationwide face massive funding shortfalls. They are
the result of a perfect storm of flawed accounting, which fueled
unrealistic employee demands that were then underfunded by
politicians. In plans across the country, during booming years of
the late 1990s, many workers were promised retirement payouts that
were "too good to be true" and, thus, impossible to make good on.
The miscalculation is massive. Technically estimated at $452 billion
as a result of flawed accounting, the real unfunded pension
obligation in state pension plans is closer to $3 trillion.
The bill is now coming due.
Professor
Joshua Rauh of
Northwestern University projects that even if public sector
plans earn 8% on their investments, four states -
Illinois,
New Jersey,
Connecticut
and Indiana
- will run out of assets to pay retirees by the end of the decade.
States and local governments will soon find themselves up against a
painful tradeoff: between closing schools and libraries and cutting
other essential services or paying inflated pensions to 50-year-old
retirees.
No one begrudges a secure retirement for police officers,
firefighters and other public servants. But unless states act now by
closing insolvent plans to new hires and reducing the rate of
benefit accrual for current employees, they won’t be able shore up
enough to guarantee at least some of what’s been promised.
For now, unions have been unyielding to proposals that alter pension
formulas for current workers. When
Colorado
froze the Cost of Living Adjustment in the state’s pension formula,
the union sued, noting the move erodes retirees’ purchasing power.
That’s one reason why most pension reforms affect benefits only for
new hires, which won’t make a real difference in the tab for many
years. Unions instead seem to prefer that states go bankrupt to pay
the full bill. All while workers in the private sector are
confronting their own retirement losses, high unemployment, and the
certainty of higher future taxes, leaving everyone who isn’t in a
public sector plan with a much bleaker future to look forward to.
Even more troubling, some of the states with the biggest fiscal
troubles, like
New York, guarantee pension benefits in their state
constitutions. This has left Albany legislators with few options for
reducing costs in the state’s pension system, short of a
constitutional amendment.
As legislators debate, the cost to taxpayers is growing rapidly.
One-fifth of New York City’s budget was spent on pension and health
benefits this year. The city’s $40 billion pension hole means that
by 2016, that $6.8 billion pension expenditure will nearly double to
$12 billion. While the city can in a worst-case scenario declare
bankruptcy, the state cannot.
The alternatives in this scenario are bleak.
First is a federal bailout. But even if we can afford another
trillion dollar plus bailout - a big "if" - should the citizens of
the rest of the country foot the bill for the gold-plated pensions
of Connecticut and Illinois retirees? And what reward does that
provide for states that have acted responsibly?
Or states could end up simply defaulting on some or all of their
debts. This hasn’t happened since the
Great Depression. But 25 years ago, we didn’t expect
General Motors to file bankruptcy - until excessive retirement
benefits and escalating wages finally killed the goose that laid the
golden eggs.
If public sector unions are truly interested in helping their
members secure a decent retirement, rather than leading us all off a
fiscal cliff, they will take proposed reforms more seriously.
Freezing the Cost of Living Adjustments and reducing the rate of
benefit accrual in public pension systems is a start.
Closing defined-benefit plans to new hires, in favor of 401(k) type
plans, will also help - and will give younger workers the ability to
take their retirement accounts with them if they move to a private
sector job.
Unions should accept that getting most of a retirement benefit is
better than getting it all, when getting it all comes at the cost of
pushing the country into stagnation.
Norcross is Senior Research Fellow at the
Mercatus
Center at
George Mason University. Zywicki is Foundation Professor of Law
at George Mason University and Mercatus Center Senior Scholar.
Read more:
http://www.nydailynews.com/opinions/2010/08/08/2010-08-08_how_public_worker_pensions_are.html#ixzz0wyVq2hiZ
