Pension Politics

It looks like the legislature and the governor are close to a deal on pensions. While they have decided to exclude the University of California from the reforms, everyone inside and outside of the UC system should be concerned about the politics behind this move to rein in public pensions. First of all, one of the main motivations to make this deal now is that many Democrats feel that the best way to coax voters to support the governor’s tax initiative is to show citizens that the Dems are serious about controlling future governmental expenditures. Also, many Democrats in the legislature believe that they can win a super-majority in both houses, and so they are going after seats in swing districts.

However, there are several broad issues concerning this pension reform that we should consider. First of all, what does it say about unions and the Democratic party when they lead the way in reducing benefits for future workers. In the proposed new system, many workers will have a hard time waiting until 65-67 to retire, and the change in retirement age will reduce their retirement checks by a large amount (during a time when retiree healthcare costs will continue to increase). While it looks like the Dems are being responsible, who is protecting the most vulnerable workers? Another major problem is that the deal undermines collective bargaining and the ability of workers to trade wage increases for retirement security.

What the current discussion of pension reform fails to mention is that the major cause for the underfunding of pension plans is investment losses, and this reform puts all of the blame on the cost of benefits. What we need is real Wall Street reform, which would protect pension funds against huge losses. It also does not help that the Fed is keeping interest rates so low that pension funds have to move almost all of their money from bonds to stocks and other higher risk asset classes. Moreover, the recent Libor scandal shows that pension funds have lost significant value because banks have manipulated interest rates.

History may remember this period as a time when all of the major liberal institutions—unions, the Democratic party, and public employees—accomplished the goals of the conservative revolution. While it may seem that we are only trying to show the public that we are fair and rational, we are actually feeding the Romney-Ryan rhetoric that the only solutions to our problems is to cut the benefits of the next generation.