Most people think about public employee pensions — to the extent that they think about them at all — as a financial problem. They hear them discussed in opaque actuarial terms like funding ratios, discount rates and annual required contributions. And the numbers are daunting: More than $4 trillion in outstanding liabilities by one estimate.
But this mindset misses the fundamental problem, which is not financial but political. State pensions' fiscal problems are actually a reflection of a deeper political problem: How to combine modern democracy and fiscal responsibility.
Ultimately, governors and state legislators control the plans. The question is whether they will use that power to bring pensions in line with economic reality. So far most have not.
The Great Recession set off a movement to reign in public employee pensions across the country. To address budget imbalances, every state and Puerto Rico enacted some sort of pension reform. It would seem that state governments used the crisis as an opportunity to address a growing problem. But appearances can be deceiving.
Most observers agree that the steps taken in most states are far from sufficient to address the problem. The reason is that most of the changes apply only to employees to be hired in the future — not existing employees or those already retired — so the savings will take decades to materialize.
Why? The principal players in pension politics have strong incentives to push costs into the future and weak incentives to impose pain in the present. Because pension politics militate against retrenchment, most states kicked the can down the road.
The basic forces at work in pension politics push toward expanding benefits. Most voters have little understanding of defined-benefit pensions, which are now rare in the private sector, where most people work. In addition, pensions are discussed in confusing actuarial language, making it difficult for the public to gain a better understanding.
The primary interest groups with skin in the game are public sector unions (which want better benefits for their members) and financial management firms (which want more pension fund dollars to invest). There are no well-established organizations pushing back against these interests.
The structure of pension policy also gives politicians of both parties the means and motive to promise public employees more compensation in retirement and leave the bill for future generations. Pushing the costs into the future allows Democrats to shore up their alliances with public sector unions and free up space in current budgets for other spending initiatives. For Republicans, shorting the pension fund leaves more budgetary space for cutting taxes. To cap it off, many state legislators lack a firm grasp on the technical features of pension plans.
Even if state politicians want to get a hold of their pension systems, they are often constrained by constitutional provisions or prior statutes. For instance, the "California Rule" is a state constitutional doctrine that prohibits the modification of current public employees' pension benefits. It stipulates that public plans cannot be frozen like plans in the private sector.
These factors form a daunting edifice for any pension reformer. Only a major crisis could open a few cracks in it. Therefore, states where major reform did occur stand out. They include Rhode Island, Utah, Virginia and New Jersey. Each of these states benefited from some combination of leaders willing to spend political capital on the issue, pre-existing fiscal conditions, lower legal barriers and restrained interest group power.
The lesson: Genuine reform can happen. States that are serious about getting a hold on pension costs are increasingly introducing defined-contribution options or hybrid plans. As more states take this step, it will become less controversial and easier for other states to follow suit. This bodes well for the next round of pension reform. The states that made big changes in the last few years provide a roadmap for the future.Daniel DiSalvo is a Senior Fellow at the Manhattan Institute and an Associate Professor of Political Science at The City College of New York-CUNY. He is the author of the forthcoming report, "The Limits of Retrenchment: The Politics of Pension Reform," published by the Manhattan Institute. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.