Government Budgets vs. Public Unions
I have been predicting for years government budget problems would finally boil over into a crisis. This is starting to play out in states like Wisconsin, Ohio and New Jersey. California, which has severe budget problems, is considering major layoffs of public employees. The scope of these problems is well beyond superficial budget cuts. And, massive tax increases are out of the question. It’s going to take a courageous new direction to get these state budgets under control. The solution being offered is a restructuring of benefits, with public employees contributing a larger share.
A Growing Cause of Budget Problems
The heart of the budget problems, for most states and municipalities, is the exploding cost of pensions and health benefits for public employees. These costs are demanding an ever increasing share of state budgets and this is affecting other critical public services. Cities and counties are also struggling, with many teetering on the edge of bankruptcy. Some have outsourced their public services. Others have simply stopped making their pension payments. This problem is definitely going to get worse, as the population ages and a higher percentage of workers start retiring.
A Sense of Fairness
Most people respect and appreciate teachers, police and firefighters. And, most people want them to make a good living and have decent benefits. However, most people won’t receive a pension. And, most people have to pay for part or all of their health benefits. So, it doesn’t seem fair to some people to have to pay for their own health insurance, save for their own retirement and also be forced to pay for these types of benefits for public employees. It seems only fair public employees should pay a fair share of their benefit package.
It is my personal opinion that every public employee, from the President of the Unites States to the people who pick up trash in the park, should receive the same type of health and retirement benefits as taxpayers. I don’t think Congress or any other government entity should be exempt from any laws or requirements forced upon citizens. I believe the retirement benefits for the President and members of congress are obscene and they should be replaced with a 401K plan. These are the fundamental principles our country was founded upon. Our government is not above the law or the people.
The Decline of Unions in America
The government is always a step behind the private sector, when it comes to efficiency and innovation. And, the fate of unions is a prime example. Unions have been declining in the private sector for decades. But, this is just starting to be felt in the public sector. I believe public sector unions will follow the decline of private sector unions, largely for the same reasons. The confrontational nature of collective bargaining, combined with standardized pay, lowers productivity, reduces incentive and causes disruptions.
Historically, pensions were the power center of a union. The wealth locked in the pensions provided a huge amount of leverage and security for the union. Unfortunately, the aging unionized workforce has turned the pension plan into a liability. Union pensions are now a Ponzi scheme that can’t possibly grow membership to support the snowballing costs of retirement benefits. This arrangement isn’t sustainable and it will soon come to an end. I suspect most younger union workers would be better off with a personal 401K account, than a union pension that will likely become looted or insolvent.
In my second job, I worked as a journeyman retail clerk. I earned good pay, had great benefits and I enjoyed my job. But, when I left that company, I decided I would never work union again. One reason, was that I worked much harder than my coworkers, but received the same pay. And, this didn’t seem fair to me. Another reason, was that I hated the confrontational environment between workers and management. I felt like there should be more of a partnership toward the success of the company. The union’s role created unnecessary stress and friction in the workplace.
The Bottom Line
The bottom line is that change is necessary to address the budget problems at all levels of government. Taxpayers simply can’t afford to fund the massive open-ended liabilities from public pensions and other entitlements.
“Look at how other states are following New Jersey … In Wisconsin and Ohio, they have decided there can no longer be two classes of citizens — one that receives rich health and pension benefits and all the rest who are left to pay.”
Christopher Christie – Governor of New Jersey
Recommended Reading
Buy Like Buffett – Wisconsin Protests: The SEIU vs. The Wisconsin Governor
The Daily Beast – Wisconsin’s ‘Anti-Union” Hysteria
PBS News Hour – What do Wisconsin Protests Say About Organized Labor
This post was featured on the Carnival of Personal Finance over at Saving to Invest. If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the greatest carnival on the net.
Bret,
And the funny thing is… there is already a public sector “401(k)” type plan for education… Say hello to the 403(b) http://en.wikipedia.org/wiki/403(b)
Apparently it is easier to administrate than the 401(k), so maybe we’ll see more people with 403(b) (it even includes a Roth option) plans in the future?
-Paul
Paul,
I forgot about the 403B plan. I suspect it will play a much bigger future role as defined benefit pensions are phased out. This is what happened in the private sector in the ’80s and I’m glad I still have my old 401K proceeds tucked safely in an IRA. My friends and family who worked in the supermarkets are pretty sure the pension has been looted and they are taking the one-time payout.
Bret
Hi Bret, it’s good you’re aware of this problem. There is no way to balance the budgets without severe cuts. We are better off than most here in TX because the state constitution mandates a balanced budget every year.
I am old enough to remember the 1980s when the public sector earned less than the private, but they got more job security and better benefits. Now they get better everything. My last social worker job was for a private company that did all of its work for the state of Massachusetts. I was paid about 40% less than my state counterparts, and some of them did no work at all because of their political connections.
That was an interesting video. I see that WI teachers get $78,000 for a part time job, which comes out to $108K if they were full time. It’s amazing to see they think they are underpaid.
Jennifer,
I believe the $78K was for pay and benefits combined. Still, teachers do pretty well, when you consider their average pay per work day. Our school district is one of the highest paid in the nation and still teachers went on strike last year. It was pretty ridiculous, if you ask me. They were marching around with signs saying they were doing it for the kids, while our kids got sent home for a week. Obviously, it was all about the money.
There’s no question the pay gap has closed dramatically in the public vs. private sector, especially in the last 10 years. I had a lengthy Facebook discussion with a teacher friend and he was upset about the Wisconsin protests. And, he brought up the same old teachers are underpaid argument. I told him that it’s a free country and teachers have choices. But, I don’t see many teachers leaving for the supposedly higher paying jobs in the private sector. That’s because they come with long hours, layoffs and accountability.
I don’t think it’s unreasonable for public employees to kick in some more towards their health insurance and pension. If they want quality health care and pensions, they shouldn’t have any problem paying for it. Taxpayers pay for 99% of teachers pensions in Wisconsin, which seems unfair to me.
As for banning public unions, that’s a much more difficult question to answer. In the private sector, if your employer is broke, you get laid off. And, you don’t get to picket or protest. I believe working for the government is a privilege, not a right.
Sorry a little late to the post, but found this while browsing through your site. Its a great post and I completely agree that pensions are the issue. I have relatives that worked of the state for 20+ years and both are about 65 and retired making 98% of their salary. Kinda crazy. I say good for them b/c they worked the system properly, but going forward, it must be changed for new hires. Especially for our generation, we are going forward being responsible for our own retirement, we must invest in things like IRAs and 401ks to retire…why should should the public sector be any different?
“Why should the public sector be any different?”
Travis,
That’s a great question. My simple answer is that they shouldn’t. There is an increasing awareness that this has to end, even among some public employees. Right now, retired firefighters in NYC make more than active firefighters. It’s unsustainable.