The truth about pensions

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David Cay Johnston, the Pulitzer-Prize-winning former New York Times reporter, has a brilliant piece on his blog about public-employee pensions. His basic point: the mainstream media, including his own former paper, have utterly missed the point about how pensions work:

[Wisconsin] Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to "contribute more" to their pension and health insurance plans.

Accepting Gov. Walker' s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.

Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

How can that be? Because the "contributions" consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services.

Public employees (like the few employees in the private sector who still get pensions) bargain collectively for compensation packages. Some of that compensation comes in the form of deferred pay, which the employer puts aside into a pension fund. In San Francisco, some city employees several years ago, through negotiations, agreed to forego a pay raise and instead accept more deferred compensation; that is, the money they would have received in wages now goes into their pension fund.

When you say that those employees "contribute nothing" to their pensions, you're not telling the truth:

The fact is that all of the money going into these plans belongs to the workers because it is part of the compensation of the state workers. The fact is that the state workers negotiate their total compensation, which they then divvy up between cash wages, paid vacations, health insurance and, yes, pensions. Since the Wisconsin government workers collectively bargained for their compensation, all of the compensation they have bargained for is part of their pay and thus only the workers contribute to the pension plan. This is an indisputable fact.  

More:

Thus, state workers are not being asked to simply "contribute more" to Wisconsin' s retirement system (or as the argument goes, "pay their fair share" of retirement costs as do employees in Wisconsin' s private sector who still have pensions and health insurance). They are being asked to accept a cut in their salaries so that the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.

At the time that San Francisco officials agreed to use deferred compensation as a way to avoid pay raises, it was a politically easy decision: The stock market was booming, and the pension fund was making so much money from its investments that the city could in effect keep that money (the pay raises that would have gone to the employees) and use it to avoid tax increases or cuts somewhere else. Unless they were fools, the city officials who signed off on this deal knew, or should have known, that at some point the stock market would come back to Earth, and the city would have to pay the deferred compensation out of the General Fund.

Now: You can argue that those contracts were overly generous and should be renegotiated. You can argue that the city can't afford to pay its workers as well as it once did and that they should take further pay cuts (beyond the half-billion or so they've already given back). I don't entirely agree, but at least that's an honest argument.

But to say that city workers aren't contributing to their pension fund, or need to contribute more, is dishonest. For the newspapers to report that as fact is bad journalism.