Public employee pension funds may be the last redoubt of defined benefit plans, but the walls of that redoubt may be decaying.
While the number of corporate defined benefit plans has plunged in the past 15 years, and such plans are an endangered species, the public employee defined benefit plans, until recently, seemed to be flourishing.
But now there are serious doubts about the long-term viability of even public employee defined benefit plans.
Public employers would seem to have some advantages over private sector employers that make the public sector defined benefit plan more secure than its corporate counterpart.
For example, while corporations can, and do, go out of business, state and local governments seem to have indefinite life spans. Second, public sector plans can finance their defined benefit plans by raising taxes. Corporations must pay the costs of their plans out of revenues from sales of products or services. If the pension costs get too high, the company might price itself out of business — which is just what a number of U.S. steel companies did.
Cost pressures in an intensely competitive world have been one of the main causes of the demise of corporate DB plans, and those cost pressures must ultimately catch up with public employee defined benefit plans.
The costs of public employee pension plans are borne in large part by taxpayers who are not public-sector employees. They pay for the pension benefits through state income taxes, sales taxes or real estate taxes.
At some point those taxpayers will object to the costs of the public-sector defined benefit plans, especially when they no longer have such plans and must depend on 401(k) plans for their retirement. Why, they must surely begin to ask, should public-sector employees have better benefits than the majority of the working stiffs paying the taxes?
In the past, the answer might have been because public-sector employees earned less on average than private sector employees. Public-sector employees supposedly accepted lower wages during their working careers in return for greater job security and better retirement benefits.
This is no longer true. Public-sector employees on average now earn $5 an hour more than private-sector employees, according to Bureau of Labor Statistics figures. The BLS shows the average state and local government employee earns $21.54 an hour, compared with $16.40 for the average private sector employee.
Comparing white-collar employees alone, the average state and local government employee earns $24.32 an hour, compared with $20.34 for private-sector employees. In addition, according to BLS figures, public-sector employees can retire on full pensions an average of five years earlier than private sector employees. Why is that fair?
As long as the general public is unaware of these discrepancies, public-sector defined benefit plans may continue for a few years more. But the scandal over the blatant underfunding of some public-sector funds will bring the day of reckoning closer.
At some point, taxpayers will rebel against the cost of these rich defined benefit plans. In some places, the rebellion has already begun. On Long Island, voters rejected almost one-third of school budgets this past June because of huge proposed increases in property taxes, driven in large part by teacher pension costs.
In the next decade, I suspect a significant number of public employee defined benefit plans will be closed to new entrants. New employees will have to rely on defined contribution plans, as so many private sector workers do today.