Government Retirement Benefits
Government Retirement Benefits
As public pensions
come due, the
Who is going to pay?
College-age voters traditionally support Democrats, and in elections the game is getting your supporters to show up on Election Day. That's why part of President Obama's campaign is focused on firing up these young voters by addressing issues such as student loans, mandated birth control coverage, and some observers speculate he'll have something to say about marijuana laws before the election.
It would serve these young citizens well to brush up on another issue that will affect their future: retirement benefits for government employees.
Not a simple issue, nor is it the sexiest but, like the national debt, it is an issue that directly impacts the money they have yet to earn.
For many years, employees in the private and public sectors earned retirement benefits in the form of pensions that promised to pay them a certain amount every year in retirement. The amount is set using a formula based on number of years worked and final salary amount. Employers, based on the advice of actuaries, agreed to make small donations, on behalf of every employee, to a pension investment fund.
By doing so the investments were to grow, ensuring there would always be enough to provide generous pension and health benefits for retirees.
In the 1980s the private sector began moving away from pensions, opting for defined contribution plans such as the 401K because the rising costs of pension obligations were draining company earnings.
Rather than promise what each employee would receive in retirement, companies would instead contribute a percent of employees' salaries toward a 401(K) or similar defined contribution plan. In contrast, the public sector elected officials negotiated with public sector unions and continued to promise generous retirement benefits for government employees.
Here is the problem: The pension investment funds haven't earned what was promised, taking a big hit in 2008.
A promise is a promise, however, and government retirees still have to be paid. State and local governments and school systems have to dip further into their revenues to feed the pension fund. That means reduced services and increased pressure to raise taxes.
Locally, Traverse City Mayor Michael Estes has been watching the developing unfunded pension liability storm for years. He said that in 2001, the city contributed $300,000 to the pension plan for city police and firemen. In 2011, the contribution grew 500 percent to $1.5 million.
City Commissioner Michael Gillman said for all employees, the city's donation went from $900,000 in 2001 to $2.9 million last year. That's $2 million less for city services.
Last year, 40 percent of all taxes paid by city residents went toward legacy retirement costs. Estes says that's why five city employees were laid off last year, and why the city will face the same dilemma next year.
The same problem is causing budget headaches for Traverse City Area Public Schools (TCAPS). Budget director Paul Soma said of the $6,846 state tax dollars TCAPS receives for each pupil, 18 percent ($1,214) goes back to the school retirement fund, up from $1,025 the year before. Soma says it will continue to increase.
Each year TCAPS makes a payment to the school retirement fund based on total payroll. In 2005, the payment was 15 percent of payroll. For 2012 it's slightly less than 25 percent of payroll, and estimated to increase to 27.3 percent for 2013. More money to the retirement liability means less money for actual education.
The issue is widespread, affecting states, municipalities and school systems across the country. Thom Reilly, a former county manager in Nevada, now a professor of social services at San Diego State University, told CNN that several cities have already filed for bankruptcy due primarily to pension costs.
"These pension promises are coming due," he said, "and the payments are so large the cities can't function and offer their core services."
He blames the problem on elected officials who placated employees with deferred retirement plans that would not have to be paid until long after those same officials left office.
Unless something is done, like moving more public employees to 401(K)-type retirement plans, the future for young voters means higher taxes, fewer government services, and less money for education.
It would behoove them to study the issue and discover who is looking out for their money.
Contact Ron Jolly at firstname.lastname@example.org.