American Elephants

Public sector workers in Wisconsin are, though they don’t seem aware of it at all, getting off easy.  Governor Scott Walker is asking government workers to pay a little more of their health care costs, and to pay a little more of their pension costs.  He is addressing the enormous problem of the circular power game engendered by collective bargaining over benefits.

Union members’ dues are collected by the state and given to the unions.  The unions use the dues to fund the campaigns of the officials with whom they will bargain over the benefits of union members. The incentives are for the officials to give the unions whatever benefits they want, so that they will get union money for their campaigns in subsequent years. The taxpayers who foot the bill for the whole thing have no seat at the table, and can only influence events by throwing the bums out — which the very Democratic state of Wisconsin did in November, 2010.

Hence the protests, violence, screaming and general misbehavior in Madison, and the occupation of the statehouse, which apparently has left the building dirty and reeking.

What is not on the program in Wisconsin, and should be, is the idea of Defined Benefit Pensions. In principle, these plans are designed to be pre-funded.  Employees are supposed to set aside money during their career to pay for the benefits they will receive in retirement.  In some cases, employees have to pay part of it themselves.  The employer, the state, invests those assets in equity investments with a smaller portion in fixed-income vehicles like bonds.

The problem is that the employee’s benefits are unaffected by the performance of the assets that are supposed to support the benefit.  Defined benefit plans are designed to shift investment risk from the employee to the employer.  Over the long term, defined benefit plans, especially those where the benefit keeps growing because of crooked collective bargaining, make very difficult situations for employers (think Chrysler and GM).  In 2009, 84% of state and local workers in America were offered a defined-benefit plan.  When state pension plans lose money, taxpayers must step in to make up the difference, because the defined benefit is promised — regardless of real world conditions.

When you hear terms like “unfunded pension liabilities,” you probably want to pay attention. Most people in the private sector now have Defined Contribution Plans, or 401(k)s.

Actuaries are folks that are really good with math, but nobody can predict the future.  Any time someone presents you with a program that is telling you what to expect ten years from now — is full of it.  Insurance plans cannot promise to fulfill your future needs, they can only make assumptions based on current conditions.

Life is risky, and grownups assume the risk and try to prepare for it.  Adolescents expect someone else to take care of them.