TeeJaw Blog

State Coffers Are Not A Widow’s Cruse For Public Employee Unions

Posted in Government and Politics by TeeJaw on Friday, March 4, 2011, 8: 37 AM

Collective bargaining by government employee unions for wages, pension and health care benefits has always been a racket where the politicians and unions make a deal for the taxpayers to pay tons of money on a union contract and then the unions turn a lot of that money right around and give it back to the politicians in the form of campaign contributions. The bargaining is not just about wages and benefits for government employees, it’s also bargaining for the unions to fill the coffers of politicians’ campaign and election expenses. Since state and local governments in which this occurs have been almost exclusively in the control of Democrats, the essence of this system has been that taxpayers have been forced to finance Democrats’ election war chests.

One of the ways public employee unions have kept the loyalty of their members is by promising them huge pension benefits. Unionized government workers have been able to retire in their 50’s with 75% and sometimes up to 90% of the their last three years’ earnings. During those last three years they get in as much overtime as possible in order to increase their earnings in those years and boost their retirement pay.

These pension plans are defined benefit plans meaning they involve a promise to pay a pension benefit many years in the future, as opposed to defined contribution plans which are funded annually with no promise of what the ultimate retirement benefit will be. The pension contribution made each year to a defined benefit plan is determined actuarially with certain assumptions being made as to what the future earnings within the plan will be, etc. in order to result in an amount at the end that will be adequate to pay out the promised retirement benefit. If those assumptions are wrong the fund will not be sufficient to allow the government entity to fulfill its promise to the employee. If that is the case the employee will not receive the pension benefit unless the government entity pays it out of current revenue from taxpayers. Thus, there is constant pressure to raise local taxes and keep them as high as possible in order to pay retired employees. This is a scheme that cannot go on forever, and when something cannot go on forever, it won’t.

The end is near. Past pension contributions have assumed an 8% annual return on investment enabling state and local governments to reduce their annual pension contributions. That has proved wildly optimistic. With interest rates near zero annual returns have also been near zero. Taxpayers are catching on and are resisting the fleecing they being given to pay enormous pension benefits, especially when no one in the private sector has such a sweet deal. A shortfall has been predicted for years but now we are finding out that it’s not just the pension funds that have been overstated, the amount of the shortfall has been grossly understated. The pension shortfall appears to have been understated by at least $1.5 Trillion.

Taxpayers are not going to be able, much less willing, to make this up and bail out the public employee unions and their local politicians. The future of public employee unions is going to be much different no matter what the outcome of the political battles presently burning hot in Wisconsin, Ohio, Indiana, Rhode Island and soon many other states. A reality check is coming.

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