Why Demonize Public Employee Unions?

The widespread fiscal problems of state and local governments are focusing criticism on government workers and the unions that represent them. Yes, their compensation, especially pensions and health benefits in retirement, are too expensive, and need to be adjusted to reduce the unwieldy tax burden. But don't blame the unions or the workers alone -- the people ultimately responsible are legislators, mayors and governors. The financial crisis has exposed these problems, and it's up to the taxpayers to learn about these complex issues and force our elected officials to get costs in line.

All sorts of media have been writing on public unions, and pension and retirement plans. The Economist magazine carried an editorial and a feature, both talking about the erosion in unions' power, and the growing anger of taxpayers, who fund the whole thing. The New Yorker this week also had a comment about the declining power of unions.

From the feature story in The Economist:

Wage differentials are relatively small in the public sector. Lower-level workers, such as secretaries, are usually better paid than their private-sector equivalents, whereas higher-level workers are worse paid. This not only makes it difficult to attract high-flyers into the public sector, but also makes it hard to raise standards by, for instance, putting the best head teachers in charge of groups of schools.

At the same time, benefits are generous in the public sector. Governments tend to give their workers light workloads and generous pensions in lieu of higher wages...The defined-benefits revolution that has swept through the private sector has hardly touched the public one: 90% of American state- and local-government workers have defined-benefit plans, compared with 20% of private-sector workers.

What's unfortunate is when the spiking abuses get confused with the "real" 99 percent, or whatever the proportions are. The average state worker is not living like a prince, says a study by two labor economists, Keith Bender and John Heywood, at the University of Wisconsin - Milwaukee:

• Employees in state and local sectors are twice as likely as their private sector counterparts to have a college or advanced degree.
• Wages and salaries of state and local employees are lower than those for private sector workers with comparable earnings determinants (e.g., education). State employees typically earn 11 percent less; local workers earn 12 percent less.
• Over the last 20 years, the earnings for state and local employees have generally declined relative to comparable private sector employees.

The public pension system needs adjusting -- downward. The salaries may need a revision, too, although to be honest I have not looked at that question myself. The causes are both simple and complicated, but the bottom line is that the legislators haven't understood, or appreciated, or taken seriously, how the pension costs grow over time. Health care is much worse.

My suggested solution, and that of many economists who study the black-and-white of this issue, is changing every aspect of salaries, pensions and health plans -- a little. Increase contributions, and reduce the growth in benefits -- not the benefits, but the growth -- a little. Push back the retirement ages a couple of years, make it more expensive to retire early.

In dollars and cents, to reduce the costs right away, the most effective way of cutting pension costs is to scale back the cost of living allowance. A one percent increase in the benefits of people already retired and current working makes up about 10 percent of the total pension liability.

Current retirees may have to share in the sacrifice. Colorado, Minnesota and South Dakota all have made such changes, but notwithstanding the pension managers' efforts to get retirees on board with the cuts, a few have brought class actions to keep the plans from making the cuts to keep the plans afloat.

Most of all, require the states to make their contributions: one big reason for the pension shortage is that the states have not been keeping up (New Jersey and Illinois are two leaders in not paying up.) And hey! -- send the legislators to a series of pension classes, and publish their test scores.

I will close with a comment, of sorts, from my late father, who also was a labor negotiator for many years, on the employer side, back in the 1950s and 1960s, the heyday of industrial America. Whenever there would be a news story or commentary that blamed the unions for the high cost of something, or just generally getting too much, he would object, and explain that the whole process really rests in the hands of management, which in the case of public unions is the state government and legislature.

He would say: "The union can only take as much as management gives them." That's important to remember -- the unions don't set their own pay, and they don't run the pension or health plans. That's the responsibility of "the government." Here is a link to a comprehensive report on what individual states are doing to cut the costs. Don't curse the schoolteachers or policemen -- take it up with your state congressmen and senators, the ones who give out the pay increases.