From one end of this country to the other, people are wondering what they're going to live on when they retire. The recession decimated many 401(k) plans, and many families didn't save at all over the past decade. Public sector employees used to feel protected from that kind of bad news -- but no longer.
Across the nation, many public employee pension funds are underfunded -- which means the governments that run them have not put in enough money to guarantee that when their employees retire, the money promised for their pensions will actually be there. State and local governments have made promises to their employees -- who number about 20 million, or one out of roughly every seven workers in the country -- that are not fully paid for and, it's now clear, will cost much more than anyone ever thought.
Therefore some governments, including New York's, are concluding that the most realistic course may be to make less grand promises to those coming into the public workforce in the future. In other parts of the country, some governments are even trimming back promises already made to those now working but not yet retired.
Though we have plenty of local examples, San Jose, Calif., is a fascinating case in point. Its mayor, Chuck Reed, reports that San Jose has been forced to implement some tough measures to get its situation under control. A look at what the city has done with its police force is sobering.
A police officer in San Jose earns on average about $100,000 per year in salary. The annual cost for that officer for pension and health benefits after retirement is about 97 percent of that payroll figure, nearly the same amount as the pay itself. Of that 97 percent, 76 percent is paid by the city. The amount paid by the police officer -- called "co-pay" in many places -- has risen sharply to the 21 percent level today.
Both parties, the city and the officer, are paying far more than anyone ever projected when the original commitments were made. Over the past 10 years, retirement costs for the city's total public employee roster has more than tripled from $74 million per year to $245 million per year. This plus the revenue squeeze from the recession and a sluggish tax base means San Jose has had to cut public services to help balance its budget. As a reflection of this, the number of city employees is now 5,400, down from 7,400. So the city is paying a lot more for previously negotiated pension benefits; the individual employees are paying a lot more; and the public and the taxpayer are receiving fewer services.
The retirement systems in New York State and the New York City system all rank among the most solidly financed in the country. Not perfect -- but in the top ranks. Down the road, however, big problems are foreseeable. One of the shabbiest provisions in an otherwise impressive series of state budgets over the past few years in New York State has been a rule that allows localities and the state itself to borrow in order to pay what they owe the pension funds for their employees. And under this gimmick, who do they borrow from? From the pension funds themselves. What this does, of course, is make the final bill steeper, because in New York there is an ironclad constitutional guarantee to employees that legally negotiated retirement payments cannot be rescinded or reduced.
Another mistake both for New York's retirement systems and throughout the country has been to overestimate investment earnings in calculating the future assets they will have accumulated to pay retirees. Many pension funds have been assuming 8 percent per year, which has not been achieved in any year since the Great Recession began in 2008. An interesting point of comparison is what Warren Buffett assumes for his company's pension fund: 6.6 percent.
The choices are difficult. Down the road they'll be a lot worse if we do nothing. The time to start sorting this out is now.
Peter Goldmark, a former budget director of New York State and former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund.