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Friday, October 15, 2010

The Paralysis of the State

I agree with David Brooks that unfunded public (and private) sector pensions are a major problem that must be faced sooner rather than later (The Paralysis of the State, New York Times, October 12, 2010: A25).

There are however two points with which I must take issue. First is his statement that public sector workers average $14.00 more than private sector workers; traditionally the gap has been in the other direction with private sector workers earning a premium over public sector workers. This reversal is not due to the irresponsible generosity of public sector employers; rather it is due to the fact that private sector wages have stagnated due to top management of private sector employers (and especially the very top managers) having reaped in their pay an benefit packages all the gains in productivity that have been achieved in America over the past decade.

Secondly, under the traditional model, the lower public sector wage was balanced by enhanced job security and good pensions. Security is gone especially at the state and local level. These pensions are not undeserved, they compensate for years when the wage gap was in the opposite direction.

As citizens we need to do two things: We must ensure that pension funds for state and local governments be merged so as to minimize administrative costs and increase the actuarial benefits that come from a larger pool of pensioners; we must also make sure that, once there is an economic recovery, we raise taxes to properly fund these benefits.

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