The Confused Debate About Public Sector Pay and Pensions

Government employees don't typically receive front page treatment in the national press. But these aren't typical times. Public sector workers are suddenly caught in the media limelight, with two front page stories in the New York Times this week -- for good and bad reasons.

With states facing record deficits in 2011, governors are looking to cut salaries and pensions of government employees -- and the public is standing behind them, cheering all the way for retirement cuts. But pension payments didn't create this year's deficits (that would be the global recession), and pension reform won't fix this year's state deficits any more than Social Security reform would balance the 2011 budget. So why are Fox News, the New York Times, USA Today and other mainstream media harping on public sector retirement accounts?

The specter of overpaid government workers feeds the public perception that Big Government is bloated and wasteful while average families are starving for cash and counting pennies. But we have to be careful about separating this year's deficit debate from the future's deficit debate. To fix this year's deficits, governors and mayors will to make targeted cuts and raise taxes. To address future deficits, we should start thinking about finding affordable, generous ways to provide security retirement for low- and middle-class public sector workers.

THIS YEAR'S DEFICITS

Nobody is counting pennies more meticulously than America's governors. Burdened by $130 billion in total debt for 2011 and unable to print their own money, they're constitutionally required to balance their books with spending cuts and tax increases.

Easier said than done.The problem with tax increases is that they're a fast lane to public resentment. The problem with deep spending cuts is that governors can only cut in so many places. They're mandated to do some things, like keep up prison conditions. And they get federal matching funds for Medicaid, which means a $100 dollar cut can result in up to $180 in less overall spending. As a result, they're left with deep cuts in a handful of social welfare departments.

"It's a depressing exercise because we've tied ourselves in all these knots, so it's not about what states should cut but what states can legally cut," said Micah Weinberg, senior research fellow at the New America Foundation. "And that's universities, welfare programs, social programs."

Oh, and public sector salaries. The only way to save money on public workers next year is, very simply, to to cut the money you give public workers next year. "You can stop giving raises. You can furlough public employees. Or you can lay them off," Weinberg said. That's the one-year strategy to cut spending. But in the next decade, he admits, states will also have to think about how they pay for government workers' retirement.

NEXT YEARS' DEFICITS

That's where we pick up the pension debate. Public sector employees tend to receive lower-than-average wages at most positions except for low-skilled workers. But they also tend to receive better-than-average retirement plans.

Here's why. Private sector workers with 401(k) plans participate in what's called "defined contribution" plans. They invest a defined portion of their wages every paycheck, and after retirement, they collect the sum of their investments, which can range from very good to very bad. State and local government workers, on the other hand, tend to enroll in "defined benefit" plans, which means they are guaranteed a certain pension payment, no matter how the market fared during their work years.

"There is a third way," Weinberg said. It's called a "cash balance pension." Like a 401(k) plan, workers would dedicated a part of their paycheck to a portable retirement account. But like a government defined benefit plan, employers would also guarantee a rate of return on the money in the account. Ultimately, the guaranteed money would be more modest than some plush public pension promises, but it would still force governments to assume investment risk when the market tanks. This way, it would protect both taxpayers and public workers.

"You have to ask: What are we trying to do with pensions? You're trying to provide better retirement security for more people." Weinberg said.