New approach needed on public pensions
In his new book While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis, best-selling author Roger Lowenstein makes the trenchant point that pension and health care costs are worse in the public sector than in the private.
The reason is, "because public unions can organize politically and influence elections – which is to say, they can vote their bosses out of office." The United Auto Workers might be powerful, but, as Lowenstein points out, the union "cannot vote the CEO of General Motors out of a job."
In Nevada, not only can public employees vote legislators out of office, but, of the 63 "bosses" in the legislature, for the past decade approximately half have been government employees themselves or married to government employees. Thus, it's no surprise the pension benefits provided by Nevada Public Employees' Retirement System (NVPERS) continue to grow. In order to be re-elected at the ballot box, legislators turn a blind eye to reforming the under-funded system, as do the government-employee-legislators who have the obvious conflict of voting on their own benefit packages.
As Lowenstein explains, this creates a "moral hazard" problem, "when people's incentives are tilted toward policies that are risky, harmful, or wasteful socially." If the pension plan of a private company damages its shareholders, that's one thing. But government pension plans are society's problem. The taxpayers are on the hook for decades' worth of commitments.
In contrast, less than 20 percent of private sector employees enjoy a defined-benefits pension. Thus, employees in the private sector may well be nervously watching their 401K or IRA balances be decimated by this year's harsh stock market, where the Dow Jones Industrial Average is down over six percent so far this year.
But there are no worries for the 150,370 members of NVPERS. The average retiree aged 60 is receiving $2,216 per month (up more than 50 percent from 1998), while the average fire/police member is receiving $3,549 at age 55 (up nearly 60 percent since 1998).
Nevada taxpayers, on the other hand, should be worried. During the last 10 years the active membership of NVPERS has grown from 74,693 to 103,693, while the number of retirees and beneficiaries rose from 19,836 to 35,687. But just as with Social Security, in NVPERS the number of working members is growing at merely half the rate of the number of retired and retired-disabled members.
Indeed, the number of active members per retired/retired-disabled member (excluding beneficiaries and survivors) has changed from 4.4 in 1998 to 3.3 in 2007.
The average government worker retires after just short of 19 years of service, with cops and fireman retiring with under 23 years on the job. As Lowenstein chronicled the troubles with the New York subway pension plan: "… [E]mployees retired after 25 years, after which they were likely to collect a pension for an equivalent quarter-century or even longer. It was as if two conductors were aboard each train – one of them doing the steering and the other lazing in his rocker – and both at taxpayer expense."
The system supporting Nevada's government employees and retirees is only 77.2 percent funded. This is a slight increase from 74.9, the percentage funded as of June 30, 2006, but is still down from the beginning of the decade, when the system was 85 percent funded.
According to NVPERS' "Popular Annual Financial Report Fiscal Year Ended June 30, 2007" net assets increased due to an overall investment return of 15 percent. With just over 45 percent of the investment portfolio in domestic equities, a little more than 24 percent in domestic fixed income securities, and just under 20 percent invested in international fixed income and equity securities, it's unlikely that kind of performance can be maintained.
Given that the system has net assets of almost $23 billion to invest, maintaining the projected 8 percent investment return will also be difficult to maintain. Finally, the assumed inflation rate of 4 1/2 percent may well be too low.
"America is sitting on a retirement time bomb," concludes Lowenstein.
In NVPERS' present form, it would take real political courage to repair the system. Politicians would have to look beyond their next elections and selflessly put the greater good above their own retirement planning – both of which are highly unlikely.
To protect Nevada taxpayers, the assets of NVPERS must be divvied up amongst the members and the system changed into a 401K plan.
Doug French is a policy fellow of the Nevada Policy Research Institute.