The pension crisis that began in the steel industry and swept through the airlines and auto industries is now moving on to the public sector. Defined benefit pension plans are in jeopardy as state and local governments move to end these plans and shift to 401(k)-type plans for public employees.
Only 11 percent of private sector employers now offer defined benefit pension plans according to 2005 data from the Bureau of Labor Statistics (BLS), and only 21 percent of private sector workers are covered by these plans. Among nonunion workers, only 15 percent have defined benefit pension plans.
On the other hand, in the public sector, 90 percent of all state and local workers are covered by a defined benefit pension plan, according to the U.S. Census Bureau. At the state and local level, more than 14 million workers and 6 million retirees are covered by public sector pension plans with obligations that total $2.37 trillion.
Pension plan payouts are also higher for public sector workers. The average pension payout for state and local retirees was $16,188 a year in 2003, according to the Employee Benefits Research Institute, compared with an average payout of $7,200 for private sector retirees.
Major public pension plans paid out $117.8 billion in benefits in 2004, up 50 percent from $78.5 billion in 2000, according to the U.S. Census Bureau. Among state and local plans, pensions accounted for 2.44 percent of all spending in 2003, up from 2.15 percent in 2002.
The pension deficit now reported by state and local governments totals $278 billion. If these governments adopted the more conservative estimates used in the private sector, however, the total deficit would be $700 billion. This amount does not include retiree health benefits.
New York City put $2.46 billion into its pension fund in 2004 — eight percent of the total city budget. By 2007, the City expects pension contributions to hit $4.9 billion, or 12 percent of its total budget. Illinois’ pension plans are facing a $35 billion deficit in a state with a total operating budget of $43 billion.
Legislation to end defined benefit pensions in favor of defined contribution plans similar to 401(k)s for government employees has been proposed in Alaska and Maryland. Georgia, Illinois, Kansas, Minnesota, New Mexico, South Carolina and Virginia are all considering a shift to defined contribution plans.
California Governor Arnold Schwarzenegger has proposed ending the California defined benefit plan and instituting a 401(k)-type plan instead. California contributed $3.5 billion for pension and health care benefits for its retirees this year, almost triple what it paid three years ago. Schwarzenegger has indicated that he will put the public employee pensions issue on the ballot in 2006.
For years, state legislatures and local governments were able to justify higher overall benefits for public sector workers because wages in the private sector were generally higher. With the employer attack on private sector unions and the decline in wage growth in the private sector, however, public sector labor costs are now higher than private sector costs.
Total compensation costs for state and local government employees were $34.72 per hour worked in 2004, compared with $23.76 for private-sector workers, according to BLS and Census Bureau data. Public sector benefit costs are approaching 40 percent of total compensation, compared to 30% in the private sector, and pressure is building to cut these costs dramatically.
More than half (54 percent) of all state and local government employees worked in the education sector, with relatively high levels of worker education, unionization rates and compensation costs. In September 2004, total compensation costs for the education sector were $37.40 per hour worked. Teachers had the highest total compensation costs among state and local government employees at $47.35 per hour worked.
State and local government workers are more highly unionized than private-sector employees and have been able to maintain wages and benefits while those of private workers have been beaten down. Last year, 37 percent of state and local workers were members of a union, compared with eight percent of private-sector employees.
The average cost for retirement and savings plans was $2.23 per hour worked in September 2004, compared with 85 cents per hour worked for private-sector employees. For many full-time public-sector workers, participation in a defined benefit pension plan is mandatory, as is an employee contribution to the plan.
These public sector funds will have to rely on tax increases to stay afloat, but it’s difficult to push through a tax increase for pensions when most taxpayers do not have a pension or had one but lost it when private sector employers ditched their plans.
America is at a crossroads. Do we as a nation believe that our seniors should have a modicum of economic security? If we do, then the push for a full-blown tax-based retirement system for all workers will soon become just as important to public sector workers as it is to private sector workers.
