All pensions and health-care plans are not created equal. At the same time millions of workers in private industry have lost the benefits they once thought they had for life, another group is doing quite nicely, secure in the knowledge that their benefits are protected forever--not by some government agency, but directly by you, the taxpayer.
They are public employees in state and local governments, ranging from teachers to cops. Most collect guaranteed pensions provided through state and local taxes and their own contributions and investment returns. Overall, 90% of public employees enjoy a defined-benefit pension, compared with only 20% (and falling) of the private work force.
Even though the commitment is there, the money isn't. A study by analysts at Barclays Global Investors in San Francisco estimates that public-employee pension funds in the U.S. are short $700 billion. That's more than all state and local governments collected last year in property, sales and corporate income taxes combined. As a result, many employees in the private sector will get hit with a double whammy: while their pensions erode, increasingly they will be hit with cuts in government services and forced to pay higher taxes to cover the pensions of public employees, the kind they can only dream about. In three-fourths of the states, public pensions even come with annual cost-of-living increases, a fringe benefit absent from private pensions.
Some public-employee pension plans are well managed and adequately funded. Most are not. A study of 64 state pension systems by Wilshire Associates, an investment advisory company, found that 54 of them were underfunded by a total of $175.4 billion. The situation is even worse at the municipal level. San Diego, which is on the brink of bankruptcy, is in the hole for $1.4 billion in pensions owed but not covered.
How could this happen? Politicians neglected to put money into pension plans, made poor investments, handed out extraordinarily generous retirement packages and gave special treatment to their fellow politicians. As San Diego city attorney Mike Aguirre put it, "What has happened is that the pension plan has somewhat become a personal-benefit slush fund for council members and senior officials." Not only did high-ranking San Diego officials give themselves preferential treatment for their pensions, they also distributed outsize benefits to city workers. A department director with 39 years of service collects $148,000 a year for life; an assistant port director with 31 years, $132,000. So far, the scandal has cost the mayor his job, six pension-fund trustees have been charged, city services are being slashed and investigations have been launched by the FBI, the SEC and the U.S. Attorney.
San Diego's excesses have attracted attention, but the city is hardly alone. The California Public Employees' Retirement System, better known as CalPERS, handed out a pension check last year for $272,200 to a retired university professor. A former water-district general manager collected $206,300. CalPERS, by the way, invests in vulture funds formed by Wilbur Ross, the New York billionaire who specializes in buying bankrupt companies, slashing costs and then selling the firms for an oversize profit. Among the costs pared: pensions. In short, a public-employee pension fund makes money from the killing of private pensions.