Limit Government Employees
Government workers have been earning higher and higher wages and benefits over the past several decades to the point that it has now become unmanageable and an unreasonable expense. This is true at all levels of government, federal, state and local. Sometimes local problems in this area are worse than at the federal level because their power to seize and tax is more limited than that of the big dog. The pay is often far too high, but the benefits are even more burdensome.
We must side bar here to the military. There is no greater supporter of the military and all those directly connected than I. Although I’ve never personally served, I contend that the sacrifices they make are so significant that they should be paid more. One of the primary roles of government is to protect the people. It is the military’s job to see that we are safe. We need them to protect whatever rights we have remaining, and to that end, I would not cut a single penny of their budget. Although there is also waste in the military, and we must not squander any taxpayer money anywhere, the military must remain strong so we as a nation can negotiate from a position of strength. National security can not be sacrificed because lazy lay-abouts “need” more free services.
Other than the military, most government services are unessential and wasteful and something must be done about it. The following is what should be done.
Freeze
A freeze of all government employees at the federal level for a period of ten years has been suggested in the welfare argument, state and localities may have an even deeper problem. We can’t keep passing on the legacy costs of these employees to those private sector victims down the road.
The defined benefit pension plan must be either eliminated or fully funded for each year of employment. Most corporations have gone away from defined benefit plans because it is just too expensive and would drag the company down as more and more retirees live longer and longer into their 80’s and 90’s. As alluded to earlier, governments still offer these plans and it is rapidly breaking the bank, (bank: The working people of the private sector).
A defined benefit plan is a retirement plan that “defines the benefit” for the employee. For example, a defined benefit plan would be one that promises $25,000 per year for life, no matter what.
A defined contribution plan means that the contribution is defined but the result is not. What the pensioner will actually receive is not known. This is how most of us do it. We contribute to our plans and hope there is enough to live on later. This is how the real world operates. Government pensions operate in the Bizarro World.
Needless to say, defined benefit plans are pretty nice things to have in retirement - if you can get one
It would be much easier on taxpayers for governments, (federal, state and local – ALL) to just emulate the corporate model. Offer 401(k) plans in which the employee saves for his or her own retirement. It puts more responsibility on the employee and less on the employer. Results are not certain. Such is life.
If we were to invest into a company, we have a choice of which company we might prefer. We analyze their books, sales, income, debt to equity ratios, future prospects and a whole host of other areas, including legacy costs – the money they are obligated to pay their non-productive retired employees. If we determine these costs are too high, that they are paying their retirees too much from current earnings, we can decide not to invest into that business. We try to put our hard earned money into financially sound and reasonable companies.
We have no such option with government employees. We pay taxes regardless of how inefficiently they may operate. We are forced to be investors whether we like their policies or not. If they require us to invest more (taxes) we have no choice. We can’t say, “No, I don’t like the looks of your legacy costs, I won't buy any more; in fact, I want to sell before it goes bankrupt.”
This type of pension must be eliminated. There is a way to do it they are not doing now. It isn’t that we hate these employees, they are human beings just like us, they are our friends, neighbors, brothers and sisters. They are no better and no worse than we are, but their pay packages are more often than not far superior.
Maybe we should look at it as a family in this instance. We need to tell the spoiled children that they can’t have everything they want because the family just can’t afford it anymore. We can’t provide these salaries and pensions; it is that simple – unless we accept their role as masters and ours as obedient subjects subservient to them.
If it is determined that rather than eliminating the defined benefit, governments want to keep those great pensions, they must fully fund them in the years of the employee’s service. So if a cop earns $100,000 a year, and his pension benefit after 30 years at age 55 is $80,000 (80% is typical), then they must fully fund that pension every year in which the cop works so not to lay it all on us at his retirement. Here’s how.
When he is 25 years old and hired on for the first year, it must be anticipated what his pension benefit is to be and for how long it is likely to be paid. How can they possibly know? They don’t; they have to make educated guesses. Insurance actuaries do these calculations all the time in pension analysis.
Example:
Say the cop, (fireman, teacher – pick one) signs on and earns $47,750 wage at age 25. If he stays until age 55, typical government retirement age after 30 years, and his earnings increase at only 3% per year, he will earn $100,000 at age 55. 80% of that wage can translate to a pension of about $80,000 for the rest of his life, and often they include COLA increases.
At age 55, it is not unusual for a retiree to live until 80 or even longer these days, so it has to be expected to payout for about 25 years. This is when the cop does nothing. 30 years working, 25 years retired – not bad if you can get it. Don’t forget, great medical insurance coverage is often included in these plans. The older we get the more health insurance and medical procedures cost.
OK - so our single government employee begins receiving $80,000 in year one of retirement. Let’s assume only a 2% annual increase, by year 25, our retiree will be receiving $131,000 per year – again, not including health benefits. That’s nearly 3 million dollars in 25 years.
Defined benefits mathematics
We have to project how much will be needed at retirement age and for how long. This is an educated guess. In other words, how much money must be placed in a basket to provide the pension of the employee. If we must pay $80,000 in year one and expect to pay $131,000 in the last year, then we need a real number as a target. That number is about 2 million dollars.
In order to have a pile of 2 million dollars in 25 years, how much do we have to pay every year to end up there? Remember, we have to consider earnings rate and inflation rate, in other words we need to make an analytical long term projection. Given an earnings rate of 5% and an inflation rate of 3%, we would have to start with an investment of $31,000 and go up to over $60,000 by year 25. A total of over $1.1 Million dollars must be contributed in this case. So the government must pay about a million dollars over time to fund this single pensioner’s payment.
Sometimes people live longer, and so will have to be paid until death. On the other hand some die sooner and won’t be paid as much. This is what actuaries do. They use statistics and averages to determine contribution amounts necessary.
Some years more funding is necessary because the balance of the defined benefit account declines, perhaps due to a bad stock market. Maybe it didn’t earn as much as they had hoped, and so must contribute more. The opposite is also true. Sometimes it may earn more, so the following year contribution may not need to be as high. Actuaries use averages.
Simply put, each employee who is covered by any government defined benefit plan must be fully funded in every year that he works. So if he is paid as in the above example, the government must also have enough money that year to also put away the $31,000 it will take to fund his retirement. If they can’t afford both the salary of $40K and the pension benefit of $30K, then they must either not hire the employee or fire him.
Granted, although many government employee's pensions are that high, many are also not - yet. Feel free to cut all of the above figures in half, meaning an average long-term government employee might have a pension value of about a million dollars to start rather than two million. Most of us in the private sector would take that in a heartbeat - but we can't because we have to pay for theirs.
Unfunded Pensions
The government is obligated to the worker for a lot more than just his salary because of these great retirement plans. We can’t afford it now, we certainly can't in the future.
These plans are largely unfunded. That means there isn’t the money in the treasury to pay the retirees in advance. They didn’t make the annual payments to the plans like the corporations used to do so they just add it to the budget when employees retire. They take much of it out of current income and so taxes increase for the rest of us as more retirees begin to take their pensions.
At the local level, revenues are derived mostly from real estate taxes. A whole host of fees and income taxes are implemented at the state level to make up for shortfalls of under-funding retiree benefits and pensions. They just tell us they need more money to pay what they promised their employees they would. So your property tax goes up.
A simple solution to this is to eliminate these types of pensions for all new government employees, or to require fully funding them annually. If we don’t we will simply become a bankrupt country as others in Europe have seen.
Despite what you may have inferred from reading earlier, I am not for eliminating the pension contracts of those who already have them in place. I want to save them. Many are my friends. The sanctity of contract is very important in a free society. Regardless of the fact that many politicians intentionally fed taxpayers to the slaughter with these deals, doesn’t change the reality that it is a contractual obligation. To suggest that these very lucrative pensions be taken away from the employees is unfair to those who honestly (and luckily) signed them. In the absence of a bankruptcy by whatever government promised these goodies, they must be honored it at all possible. I am not suggesting tearing up any contracts. We shouldn’t try to change the past, but we can change the future.
To continue in this manner is financial suicide. We hear about class warfare; the rich against the poor. The idiots marching in the streets and claiming to be the 99% against the 1% of the wealthy, but that isn’t the real problem we face. The real class warfare is the public sector against the private sector. They have the connections to enact the rules to forcibly (and according to their laws legally) take our money to directly benefit themselves and injure us. We are noticing it, and we are getting pretty darn tired of it.
This suggestion is not made out of malice towards public employees or to exacerbate the class war between the public and private sector. It is not the intention to hurt any of them. It isn’t the employee’s fault for accepting a great package; most of us would have done the same. This is just a common sense approach to reality. If we don’t change this method of operation very soon, the current employees will be in serious financial trouble because municipal bankruptcies are already occurring and there is real possibility and the courts could force them to breach those contracts.
We can’t afford to continue at this current level. We may be able to honor the agreements currently in place and avoid insolvencies only if we stop piling on future liabilities. There is no way we can continue on this course without altering the future contracts. If we have the brains and the strength to stop this for the future, we may actually be able to honor the employment deals to which we have already foolishly agreed.
It may seem that I detest public employees; not true. Many are my friends and I don’t want to see them hurt, but we have to deal in reality. Like many in government today, they prefer fantasy. There are too many government employees now and they are paid too much. Most know it but won’t admit the truth. We are in a very dangerous monetary slide now because of how high public compensation and retirement benefits has risen in relation to the public sector's ability to fund it.
Government employees may be on top of the world right now, but the fall will be devastating. To save themselves, they will have to admit that future generations of public workers can’t have what they did. We just can’t afford it. If they don’t even they can’t receive what they were guaranteed – at least in terms of expected purchasing power.
Unfortunately, those in leadership positions very likely don’t have the guts to revamp government pensions. They believe that the truth (if even they realize it) will affect their ability to retain their own positions.
Rather than fix the problem for the future, their solution will likely be several more rounds of inflationary financial policy to lessen the perception of the burden. QE 1, QE 2 – etc. This will hurt the pensioners much more than facing the certainty that it can’t work into the future. Dealing with the reality of a genuine problem is not a particularly strong suit of government. But you knew that, right?
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