Pensions are a great. I wish I had one. They used to be standard in the U.S. Most every good job had one. Many defined-benefit pension plans offered healthcare benefits, too.
What industry saw and government refused to see was that retirement ages haven’t changed much, but life expectancy has. A teacher in New Jersey who works 35 years can expect another 24 years of pension and healthcare. It’s a great deal, one that the NJEA fights hard to maintain.
One by one, industries gave up pensions. With the contraction of the U.S. steel industry, steelworkers lost their pensions. Bankruptcies of legacy airlines allowed them to shed pension obligations. The same cycle in car manufacturers took away the benefit to autoworkers.
The pattern is consistent. The company enters a prepackaged bankruptcy. The pension fund is a part. The pension obligation falls on the Pension Benefit Guaranty Corp (PBGC), a federal agency like the FDIC. Workers get a federal pension but it is typically a fraction of what the company had promised.
One industry that didn’t give up on pensions was government. The federal and state governments remain committed to pension and lifetime healthcare benefits. States don’t have the possibility of bankruptcy. Cities may, but not states.
The example of teachers in New Jersey
In New Jersey, a teacher is vested in the pension plan with ten years of service. The benefit is calculated based on the number of years of service divided by 55 or 60, based on the date of hire, multiplied by the salary in the last years of service, typically the highest. . Let’s do some math.
A teacher who starts at age 25 and works until 60 has 35 years of service. A teacher retiring today is likely making $80K. The pension payment is $51K (35 yrs./ 55 * $80K). She can expect to live another 24 years. During that time, she is also eligible for participation in the state’s health benefits plan.
Pension Fund Obligation — What is it?
In a perfect world, the state would contribute to the pension fund each year in an amount that would keep it whole for the lifetime of every participant. That means we need to be thinking 65 years into the future.
Some years, the stock market performs well. The state pension doesn’t need a contribution that year. It’s a gift — one that legislators have not failed to notice. Not every year is good, though. Some years the state needs to be contributing more. Unfortunately, those are the years the state believes it can’t afford to contribute. It’s a recession, the market is bad, and there’s no money to do everything. In those years, the state skimps on its contribution.
There is a pattern. In good years, the state doesn’t contribute, because it doesn’t have to. In bad years, the state doesn’t contribute because it cannot afford it. The results is that the NJ state pension fund is underfunded to the tune of $137 Bn. The pension fund has a balance of $81.4 Bn, 37% of what it needs to be whole. How much it is underfunded is a matter of estimate, not of accounting. If the stock market were to perform well consistently for the next few decades, things are not so bad. If the stock market were to perform badly for the next few decades, things are disastrous. Because there is uncertainty in these estimates, legislators can frame an argument to meet their needs. Usually, that means ignoring the pension problem and kicking the can down the road.
Unfunded Liability — How big is it?
Let’s use the current estimate of our unfunded liability — $137 Bn. That’s four years of the entire NJ state budget. It’s $15K for every resident of New Jersey.
How New Jersey compares to other states
New Jersey is not the only state with unfunded pension liabilities. It’s a national problem. If things don’t improve, one possibility is that the federal government would help. That’s not a very good plan â€œB.â€ When New York City faced bankruptcy in 1975, President Gerald Ford famously told the city to â€œDrop Dead,â€ according to the Daily News.
Even if New Jersey relies on a magical bailout, the state will suffer. We’ll be among the first, if not the first. to be splayed. Among U.S. states, New Jersey’s situation is better than only three states: Hawaii, Alaska, and Illinois. Alaska probably doesn’t count. It has oil income, enough to return to every resident every year. Illinois and Connecticut, the two states similarly situated to New Jersey have unfunded liabilities in the range of 30% of state personal income.
In the years when push comes to shove and New Jersey has to tax its residents to meet these obligations, we’ll see people flee. Real estate values will collapse. Life will suck. By comparison, New York and Pennsylvania are in half as much trouble.
We’ve seen a bit of the future already. Real estate prices have risen more slowly than the rest of the country since 2008. We’d have net migration out of the state if it weren’t for foreign immigrants. And no one needs remind anyone of our already high taxation level.
Government leadership needed
No gubernatorial candidate denies that the state’s position needs to be addressed. Their position on other matters, though, indicates that they are ignoring the long-term pitfalls. The democratic stump speeches all describe infrastructure spending and support of the state’s unions. These are simply incompatible with
For the last eight years, Governor Christie did the best he could to fund the gap. His style was abrasive, earning the scorn of the teacher’s unions especially. Once he is gone from office, I predict he will be seen as a wiser money manager than any of his recent predecessors.
What needs to be done.
Even Governor Christie, enemy of the New Jersey Teacher’s union, called their pensions a â€œsacred trust.â€ For those teachers who served the state for a working lifetime in the expectation of a pension, we owe them. That’s not the case for new teachers. We simply cannot afford it.
New teachers need a new deal. They will get a defined contribution plan or higher pay and a responsibility to invest for their own retirements. No, it’s not as good as the deal that current teachers have, but it’s the only way the state can survive.
Teachers are not the only ones in this group. State and municipal employees of every stripe are included. It includes college professors and legislators.
When it comes time to vote, state workers are a big bloc. In the 2017 gubernatorial primary elections, pundits predict that union workers committed to Phil Murphy have made the Democratic contest irrelevant. Once he’s in office, Murphy will have a hard time opposing state unions in fights over salaries and pensions. One cannot expect the governor to bargain hard when the people on the other side of the table put him into office.
It’s possible that Murphy’s performance in office will differ from the positions he takes during the campaign. It happened after the presidential election.
Guadagno, no darling of the unions, addresses the pension problem directly on her website. She faces two big challenges: first being elected and second overcoming a Democrat-dominated legislature. Christie did it, but won no friends. He was a rising star in the Republican Party in 2012. As the keynote speaker at the convention, he was a putative front-runner in the 2016 race. Fights over teacher compensation and gasoline taxes, for example, soured many on his approach.