Over the past few years, a number of states have realized that their finances are in danger of downing in a sea of red ink. So the search for solutions began. Do you raise taxes? Do you cut projects ? Do you slash jobs? Or maybe you slash public employee pay or benefits. That last option is one of the reasons why pubic employee unions have been protesting in Wisconsin over the past few weeks. But how did these budgets get screwed up in the first place -- is it really unions' faults?
The New York Times' David Leonhardt addresses this problem in his column today. He titles it "Union Pay Isn't Busting State Budgets." Then, he goes on to explain that, rather than pay, the benefits have caused the big problems. His observations are astute, but not particularly novel to wonks who study budget politics. In short, these employees have relatively lavish retirement and health care benefits, but relatively mediocre pay. A huge chunk of the expenses that the states face is thus often delayed.
Leonhardt explains why this becomes a problem:
Unfortunately, though, politicians do not have the same incentives to be tough negotiators on issues besides money. Why not? Because most government agencies are monopolies. They face no competition. Whether they perform beautifully or miserably, they cannot be run out of business. They also can't be run out of business by pushing off costs until a future day. So they delay too many costs and don't perform their jobs well enough.
The delaying of costs is obvious. Both politicians and union leaders have decided that generous future benefits offer the easiest way to hold down spending and still satisfy workers. The result is government pay that's skewed too heavily toward pensions and health insurance.
To be clear, I'm making an argument that's different from "Government workers are overpaid." I'm saying that they are paid in the wrong ways -- in ways that make life easier on union leaders and elected officials, at least initially, but that eventually hurt both workers and taxpayers.
This is a political problem and should sound familiar to anyone who follows national fiscal politics. It boils down to the "buy now, pay later" philosophy so popular in the U.S. It's easy to make workers happy when you're relying on the tax receipts collected by future governors and state legislatures to make good on your promises. This is why the U.S. has such a gigantic deficit. It's also why Americans love their credit cards.
But how do you fix this problem? That's a great question. If we knew how to eradicate this philosophy entirely, then we could eliminate most of the nation's economic problems. It probably boils down to some tough love measures. Leonhardt recommends cutting some of those relatively lavish deferred benefits, instead of slashing public worker pay. This makes sense, but it isn't without consequence: these workers have lived with an expectation that some level of benefits would be present in future years. They may have saved more over the years had had they known otherwise.
Going forward, states need to better account for their deferred benefits. Relying on expected future tax collections to pay for those benefits isn't an adequate strategy. A state can be fairly certain of its future liability, but far less certain about its future tax receipts. For example, if a pension pays out at age 55, then the lump sum should already be collected by then to provide subsequent payments that would be owed. Current taxes need to account for those future liabilities, or the benefits shouldn't be promised.
While there's no pleasant way to solve this problem for states that currently face it, others should act proactively to forbid their politicians from making promises to unions that aren't supported by current tax receipts. This will make bargaining more difficult, but it should be. Deferred benefits only made negotiation easy because the politicians making deals never had to deliver on their promises while in office. That's precisely what needs to change.
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