Our nation will soon be hit by another economic tsunami. Behind the union bankrolling of the 2008 elections are union pension obligations that will bankrupt governments and add to the crippling federal deficit.
Pensions sound complex and boring, the very characteristics that have gotten us in such deep trouble today. Few politicians and reporters took the time to understand the implications and the costs of defined benefit pension plans.
Most union members are promised defined benefit pensions when they retire. A defined benefit plan pledges to pay a retiree a fixed amount (usually a percentage of final salary or compensation) monthly, from retirement until death. In reality, the employer cost of these plans is understated and delayed for years. Costs rise as retirees live longer, and a slow economy makes it difficult to find money to pay benefits. For years, the enormous costs and consequences of these plans were hidden, shielded by an otherwise healthy economy.
The U.S. federal government and nearly every state and local government have committed to defined benefit plans for their unionized sectors. These promises made by government would be fine if they were not so large and irresponsible. Over the years, politicians agreed to increasingly generous plans because they were easy promises to make - too easy. Any consequences would be in the future and would have little impact on the immediate next year's operating budget. Even today, despite what we now know, any challenge to existing plans or new participants would mean a controversy.
The programs are massive: the retirement program for the U.S. federal government supports more than 2.5 million annuitants. Plus, there are 50 states and thousands of local governments supporting more than 8 million current employees. California alone has 134 public retirement systems serving more than 4 million Californians, or about 11 percent of the state's population.
The payouts are generous. Most union government workers payouts are based on their years of service and total compensation in their final year. Generally the annual payout to retirees is two-to-three percent per year of service multiplied by final compensation. A 52-year-old worker making $100,000 in his final year before retiring could get $90,000 for life. In fact, in California some 4,000 retirees receive more than $100,000 annually. Many plans also provide lifetime medical benefits. These obligations are unsustainable in an economy with shrinking government revenue.
The sheer cost of these plans is suffocating government. Local and state governments are cutting to meet these costs. Furlough Fridays for students and teachers, reduced foreign language and music courses, and larger classrooms with fewer teachers, are just some of the cutbacks. Few talk about it, but the cuts combined with the payouts (plus medical care) mean a shift in spending from the young to the retired. We are now limiting children's education to pay for older Americans. This is inter-generational theft.
The high cost of pensions are not just a state and local government problem. First, 2.5 million federal government workers also have defined benefit plans. Second, the federal government is already shifting funds to state and local governments to help pay for their plans. Some one-third of last year's nearly $800 billion "stimulus" package went to states, primarily to allow state government to both avoid layoffs and pay pension obligations. No one knows what will happen when the stimulus plan funds to states run out in 2011. Yet, I could not find non-health coverage money for state and local government bailouts in the budget President Obama sent to Congress Monday.
Third, the federal government backs non-government pension programs through the Pension Benefit Guaranty Corporation (PBGC). The PBGC reported a $22 billion shortfall in 2009. Just last week, the PBGC had to rescue a union run multi-employer fund covering 5,200 unionized workers with a $117 million commitment. The plan had less than 10 percent of the required assets despite a law requiring 70 percent funding. Similarly, a United Food and Commercial Workers Local with 240 retirees became insolvent in January and required a federal bailout of more than $5 million.
These bailouts are the tip of the iceberg. Many plans are grossly underfunded. Federal bailouts will dramatically grow through the next several years. The unions are hungry for "card check" for several reasons, but one is for newly unionized companies to bolster underwater multi-employer plans. One reason Republican Senators are holding up former union leader Craig Becker's nomination to the National Labor Relations Board is because of concerns that he would seek to implement administratively "card check" without congressional approval. Testifying before the U.S. Senate Health, Education, Labor and Pensions Committee, Becker said that he would follow the law.
But unions are desperate for "card check" as new unions mean new pensions forced into multi-employer plans. This new money would bolster underfunded plan assets so unions can meet the unmet legal minimum funding levels. Moreover, it allows union overseers to justify continuing to pay themselves "administrative" expenses that are not part of their regular union salary.
Unions now have more members in government than in businesses, but the costs that union pension plans have on our nation's finances can no longer be kicked from one political administration to the next. We are in a national fiscal crisis, and union pension funding is gasoline on our financial fires.
Action is required. Here are five suggestions:
1) Immediately freeze all government defined benefit plans. This means no newly hired workers will benefit from the plans. They should be eligible for defined contribution 401(k) or 403(b) plans, which means you pay for these plans as you go.
2) Stop all consideration of any "card check" bills. The so-called Employee Free Choice Act if made law will allow secret unionization and will destroy the ability of employers to control their pension costs.
3) Stop requiring that federal government money go only to those using union labor - which is what the Obama administration and Democrats in Congress try to put in every stimulus and jobs bill. This not only raises the taxpayer cost of government programs, but it also expands the unfunded defined benefit obligations.
4) Stop "in-sourcing" Government work. The recent initiative to shift work from private employers to government does not consider the enormous future cost of government workers and the overhead that supports them.
5) Rescind state and government union defined benefit plan obligations as the sponsoring localities and states declare bankruptcy. This is unpleasant and unfair to those that have worked careers with a promised pension, but employees are creditors like everyone else, and unlike the pre-packaged GM bankruptcy, you cannot throw over all other creditors in favor of one class.
Unions, directly and indirectly, are now believed by many to be the largest source of political contributions. And judging by White House visitor records, no other interest group has such free and easy access to the Oval Office.
Some Congressional Democrats declare privately that they will never vote against union interests. Sadly, the commitment to what's best for the nation is just less important than union interests for these legislators.
It is tragic that we must focus on those who have worked their lives in service with an expectation of a fixed monthly payment, but as our nation's fiscal woes dramatically mount because of spending promiscuity, we must make tough decisions. Sadly, we will soon be trading off health care versus education versus military benefits versus pensions.
We face a looming problem, and first we must confront it. Our political leaders must make tough decisions - rather than keep putting the burden on the next generation.
Until we confront these problems, we will deepen the challenges we are creating as we put the largest portion of our resources into our retirees.
Gary Shapiro is the president and CEO of the Consumer Electronics Association, which represents more than 2,000 U.S. technology companies.