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The Ticking Pension Bomb

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The Ticking Pension Bomb

October 21, 2018
Economy, finance, and budgets

Steven Malanga and Dan DiSalvo join John Stossel to talk about America’s underfunded government-pension systems—the costs of which are consuming larger portions of state and city tax revenues, squeezing budgets, and limiting vital public services. Steve Kreisberg of the American Federation of State, County, and Municipal Employees (AFSCME), the nation’s largest government-employees union, also joins the conversation.

Even after a nearly decade-long stock-market rally, pension funds for government employees across the U.S. have never fully recovered from the 2007 financial meltdown. Governments have increased annual pension contributions by 90% to help make up for it, but as Malanga notes in City Journal, a recent report estimated that “at the end of fiscal 2017, state government pensions nationwide were only 70 percent funded, down from 87 percent in 2007.”

Most media coverage of the pension crisis focuses on states in the worst condition: California, Connecticut, Illinois, and New Jersey. But the majority of pension funds are heading in the wrong direction, even in states like Colorado and in some Texas cities.

The bottom line: an alarming number of states and cities are ill-prepared to withstand the next market downturn. Without reform, the gap between what governments owe retirees and the money that public-pension funds have on hand could grow so large that the whole system could face collapse.

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This video is part of a special collaboration with John Stossel and City Journal contributors.  

Video Transcript

Protesters: A pension is a promise! A pension is a promise! A pension is a promise!

John Stossel: These teachers are mad because their state wants to cut their retirement benefits.

Protesters: Find funding first!

John Stossel: This conflict is about to hit most states.

Daniel DiSalvo: The problem is that the money hasn't been set aside for years and years and years.

John Stossel: City Journal contributing editor Daniel DiSalvo points out that unsustainable retirement promises now total trillions of dollars. But nobody cares.

Daniel DiSalvo: Nobody was paying attention.

Steven Malanga: There's very little sense of urgency.

John Stossel: City Journal editor Steven Malanga struggles to get the media to pay attention.

Steven Malanga: To a certain extent, I have sympathy with the media, because basically the media's looking for what happens next, right? What's Trump gonna say next? Or what's he gonna tweet next? This is not something that's going to happen next week or next month.

John Stossel: But this is gonna be a big deal. A lot of people are gonna be hurt.

Steven Malanga: We just don't have enough money, and the amount of money that we have to put into this is just mountainous.

John Stossel: How did this happen?

Daniel DiSalvo: Both parties, Democrats and Republicans have incentives to short the pension fund. For Democrats, if we can not put as much in, we can free up more money for greater public spending on public programs that we think are good. If we're Republicans, we probably want to say cut taxes.

John Stossel: Both are much more popular in terms of getting re-elected than putting money in a savings account.

Daniel DiSalvo: You betcha.

Steven Malanga: 5 years from now, 10 years from now, they're gonna have a problem. But 10 years from now somebody else is in office.

Protester: The retirees, they put in their share. Where’s the city’s share?

Daniel DiSalvo: They were promised this and now you know, you're 73 years old, and all of a sudden someone's going to say well your monthly income is going to fall by 10% or 50%.

John Stossel: They can't just stiff the retirees. They have a contract.

Steven Malanga: Well, they can if they go into bankruptcy.

Newscast: San Bernardino recently became the third California city to file bankruptcy.

John Stossel: Several California cities have declared bankruptcy. So did Detroit.

Steven Malanga: At some point, your debts are so great that you can't afford to provide basic services to people.

Daniel DiSalvo: Police force, fire, protection, all of these services will be on the chopping block.

Protesters: No justice, no peace! No justice, no peace!

Steve Kreisberg: The problem with our pension systems isn't the system.

John Stossel: Steven Kreisberg of the biggest government workers’ union says unions didn’t create this problem. Unions say, "You may not cut our pensions. It's in the contract. We're entitled to this." Where's the money going to come from? Taxpayers? There isn't enough money in the world to pay your people.

Steve Kreisberg: Well, that's not true. There's plenty of money to pay our people.

John Stossel: Five trillion dollar unfunded liability.

Steve Kreisberg: That's a figure that's used by some anti-pension zealots. As our president might call it, it's fake news.

Steven Malanga: If we apply the standards that the federal government demands that private sector pensions use, this is the number we come up with, five trillion dollars.

John Stossel: The money isn't there and you guys won't budge an inch.

Steve Kreisberg: That's not true at all. I personally worked in the city of Detroit where we budged many inches.

Governor Rick Snyder (R-MI): Let me be blunt: Detroit’s broke.

John Stossel: When Detroit went bankrupt, unions did agree to reduce workers’ benefits. Detroit's a case where the unions finally gave in.

Daniel DiSalvo: Because the federal bankruptcy judge created a precedent that said pensions could actually be cut. That was a shock to the unions and in some sense, that's been a new and interesting precedent that's called into question these strong legal protections that public pensions have so long enjoyed. They can't just sit back and say well, we're going to get paid no matter what.

John Stossel: And yet even today, when we know pensions are underfunded, politicians still shortchange contributions. To make things even worse, some increase benefits.

Steven Malanga: In California, in 1999, the unions helped elect Gray Davis.

John Stossel: Governor Davis then gave them bigger pensions. The state of California offers some of the best employment benefits, like a CalPERS retirement pension plan.

Steven Malanga: The legislators were told, "Listen, it's not gonna cost the taxpayer anything. The stock market can pay for this."

John Stossel: That's just wishful thinking. It's irresponsible.

Steven Malanga: I would say it's more than wishful thinking. It borders on criminality, frankly. If after nine years of a bull market, we haven't begun to fix this, when are we gonna fix it?"

Steve Kreisberg: The union's are not doing this. These pension plans are adopted by statute, okay?

John Stossel: The union votes for the politicians who vote in a great pension.

Steve Kreisberg: So you don't like democracy.

Daniel DiSalvo: Public employee unions regularly lobby and seek to elect politicians who are going to offer them better compensation packages. They've been intimately involved in the whole system from the beginning.

John Stossel: The unions have disproportionate political power.

Steve Kreisberg: How do we have disproportionate political power when public employees are less than 10% of the population?

John Stossel: You get out the vote.

Steve Kreisberg: If we were able to get out the vote so well, there would be somebody different in the White House right now.

John Stossel: The union says "this was a promise, a contract. You can't just take it away."

Steven Malanga: The unions in the public sector have a much broader concept of what a promise is than everybody else.

John Stossel: But it was a promise.

Steven Malanga: No, it's not a promise. When you ... That's the point.

John Stossel: Politicians promised it. They said, "here's what you could expect."

Steven Malanga: If I go to work for a company, right, and they give me a salary, the idea that I can always expect to make that salary, that five years from now if there's a recession that my company couldn't say to me, "Sorry, we're gonna have to cut your salary." That's crazy. Nobody believes that.

John Stossel: What's the solution?

Steven Malanga: Reduce the level of benefits and go to individual accounts.

John Stossel: Like 401k’s, what most people in the private sector have. So instead of just a government promise, there's an actual account with money in it?

Daniel DiSalvo: I can see it, I can see how it's doing in the market.

John Stossel: Unions generally oppose 401k’s. However, AFSCME now does say their members may have to take a cut.

Steve Kreisberg: That's what's happened. That's the facts John.

John Stossel: Really? I thought that you argue we should not have to take a penny less. You argue that in courts.

Steve Kreisberg: Well we argue, as a matter of legal right depending upon where we are, if you've earned something, that was part of the deal. If you want to say, "Look you're going to have to get a little bit less going forward?" Sometimes we'll fight over that. You see arguments. You see battles. There are winner and losers in every battle.

Protester: Look at us, people! You could be next!

John Stossel: Politicians and union bosses better pay attention because one day no matter what the promise, they simply won’t be able to keep it.

Protester: Hands off my pension!

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