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For Whose Benefit?
December 13th 02:13:50 PM
How governors deal with their pension crises will affect the course of Social Security reform.
Courtesy of OpinionJournal.com
For Whose Benefit?
How governors deal with their pension crises will affect the course of Social Security reform.
BY BRENDAN MINITER
Tuesday, December 13, 2005 12:01 a.m. EST
Social Security reform may be all but dead in Congress, but pension reform is only starting to heat up across the country. And if we are ever going to get any serious reform for the system FDR saddled us with, it will likely develop from the way Robert Ehrlich, Mark Sanford and other governors solve a very similar, if more immediate, problem now facing their states.
To be sure, no one is talking about converting state "defined benefit" pension plans into defined contribution plans, complete with private accounts and self-directed investments. But they could do a lot worse, and, at any rate, governors and state legislatures have to find a way to pay for pension guarantees that will soon swamp their budgets, all while facing down political demagoguery and defeating organized special-interest lobbies.
Maryland's situation, although somewhat tougher than most, is typical. The state has very generous health benefits for state workers--free health care for employees, retirees and their families. But it comes at a steep cost. There are now 42,000 retired state employees. This year the government will pay approximately $311 million for health benefits. But in the coming decade, as the 77,000 employees now on the payroll retire, that price tag will more than triple, to $1 billion. In all the state has about $20 billion in long-term liabilities just to pay for health care for current and retired employees and their dependents.
What's more, the Governmental Accounting Standards Board, which sets accounting rules for state and local governments, is mandating that state governments put long-term health care obligations on the books each budget year starting in 2007. Maryland doesn't need to have all $20 billion on hand in a little over 12 months. But the state does need to have a plan in place by then, or shortly thereafter, or risk losing its good bond rating.
Gov. Ehrlich, a Republican, facing a Democrat-controlled Legislature, hasn't yet put his plan on the table. Likewise, South Carolina's Gov. Sanford, a Republican facing a much friendlier Legislature, hasn't publicly released a pension proposal to match his plan for private Medicaid accounts. But any credible plan will likely have to include setting aside hundreds of millions of dollars each year in a reserve fund. If states have any sense of money management, these funds will be invested in a mix of stocks and bonds and will thereby grow to meet liabilities in the coming years.
As states create these funds, it won't be too long before someone somewhere thinks about steering the money into individual private accounts for state employees. That would take the long-term liabilities off the backs of state governments, convert their pension plans into defined-contribution plans, and prevent rising health-care costs from ever eating up funds in the budget for other political constituencies. It would also remove a compelling reason for government employees to unionize--the fact that long-term benefits depend on flexing political muscle in the state legislature. If these accounts prove successful and popular, they would open the door for Congress to think again about personal Social Security accounts.
That, of course, is the rosy scenario. It's more likely that states will retain control of these funds, invest the money themselves and use the proceeds to pay their liabilities and keep their defined benefit pensions. That was one fix for Social Security that AARP officials mentioned they'd support when they dropped by The Wall Street Journal's offices earlier this year. The result would almost certainly be an increase in the politicization of investments, as government officials bully corporate America by threatening to dump stock.
But the fight over pension reform isn't limited to states, and increasingly the private-account genie is getting out of the bottle. And that has broad implications for how powerful labor unions will remain in the coming years. Surprisingly perhaps the opening skirmish in this more parochial fight is already under way in Congress. The president is pushing legislation that would force companies to put enough money aside to fully fund their pension plans--a no-brainer for most Americans and something the Senate has already passed.
There is trouble, however, in the House, where, The Wall Street Journal reported last week, the United Auto Workers union has teamed up with General Motors to oppose any move to force companies to put more money aside for pension plans. UAW and other union leaders are worried that such a mandate will compel more companies to drop their defined benefit plans altogether and instead offer 401(k) plans, in which the company makes a defined contribution to an employee's personal investment account.
The problem with that, of course, is that 401(k)s give workers greater flexibility to change jobs and more power over their own finances--neither of which is good for increasing union membership. Rather than joining the new economy and finding ways to offer employees portable, self-directed benefits, the UAW is fighting to keep old pension plans in place, and in the process making it more likely that taxpayers will eventually pick up the tab when companies go bankrupt and flip their pension plans to the Pension Benefit Guarantee Corp.--for which GM, Ford and union-heavy airlines are all prime candidates. When that happens, maybe we should all start looking for the union label on our tax bills.
Mr. Miniter is assistant editor of OpinionJournal.com. His column appears Tuesdays.
Posted by Adam Cahn
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