Pension, or Ponzi Scheme?

Do we want public pensions? There are compelling reasons why we do

Jennifer Daniel

By Roger Lowenstein

In San Diego, fire stations are suffering brownouts. Library hours have been cut by a quarter, youth programs reduced by half. There are fewer cops on the street but more potholes, and because trimming of the city's 30,000 palm trees has been reduced, pedestrians face more risk of being knocked silly by a falling coconut.

The city has budget problems, just like every other major American metropolis. But as San Diego girds for a mayoral election next year, the biggest issue isn't the overstretched budget or the atrophy of local services. It's pensions. Councilman Carl DeMaio, who is running for mayor, is backing a ballot initiative to phase out the local pension system for city workers. Jerry Sanders, the current mayor, backs a weaker version. Rebecca Wilson, outgoing chief of staff for the system, which manages benefits for 20,000 members, worries that DeMaio's will pass. "People are very anti-pension," she says.

Why this is so in San Diego?and Trenton, Madison, and countless other cities and states?has something to do with the size of public employee pension checks and something to do with the evolution of the public and private workplace. Benefits in San Diego are undeniably sweet?firefighters and police can retire at age 50 after 20 years of service, other vested employees at age 55. A firefighter who retires after working 25 years collects a pension equal to three-quarters of his salary?again, a very good deal, although civil servants in San Diego don't qualify for Social Security and roughly half of their pensions reflect the sums that they, the employees, have been contributing.

The benefits are generous, but they're hardly so rich as to put the nation's seventh-biggest city?and the world's 33rd-richest, according to PricewaterhouseCoopers?at risk of bankruptcy. So how did pensions get to be Public Enemy No. 1? To understand the anger, it helps to answer a more substantive question: How did a conventional vehicle for retirement savings become a time bomb in public budgets?

San Diego provides a revealing case study. It costs a sum equivalent to 11 percent of the city payroll to keep the pension current each year. In other words, for every dollar that San Diego pays out in salary, it accrues 11 cents in future pension liabilities. If San Diego only had to set aside that 11 cents, people wouldn't mind. But it doesn't. It has to put 41 cents into the pension plan for every dollar of payroll. That's because the city fell far behind on funding its pension plan, which has been further depleted by successive Wall Street crashes. San Diego's future pension obligations are currently underfunded by one-third, according to a spokesman for the city's retirement system. Like a home dweller who skipped years of mortgage payments, the city has seen its servicing costs skyrocket: Its annual pension payments have jumped from $68 million in 2002 to $231 million.

The story's the same around the country. City officials in Costa Mesa, Calif., have informed nearly half of municipal workers that they can expect to be laid off in September. Fiscally strapped Republican governors such as New Jersey's Chris Christie and Wisconsin's Scott Walker, and even true-blue Democrat Andrew Cuomo in New York, are furiously trying to restrain pension costs. U.S. public pension systems are underfunded by about $1 trillion, according to the National Association of State Retirement Administrators (NASRA), and some estimates put the figure as high as $3 trillion. The gap is due to a bitter dispute regarding the proper rate at which to discount future pension liabilities. States arguably have used rates that understate their debts, although the question of what exactly is the proper discount rate is not easily resolved. The deficit, in any case, is huge?indeed, it dwarfs the losses suffered to date by the federal government in the mortgage crisis.

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