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The Other Public Sector Pension Problem

By Matthew Yglesias on January 7, 2010 at 1:01 pm

"The Other Public Sector Pension Problem"

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(cc photo by KB35)

(cc photo by KB35)

Yesterday I mentioned the huge looming budgetary problem caused by the habit of giving public sector employees deferred compensation in the form of guaranteed benefit pensions rather than higher salaries, and then under-funding the investment plans that are supposed to pay the money out.

It’s worth emphasizing, however, that even if you did fund these plans properly it’s a really bad model for paying public sector workers. I have no problem with the idea of spending a healthy chunk of change on public sector compensation, but the point should be to achieve effective public services and that would be best done by just paying people more money up-front. Putting such a large chunk of people’s compensation into pensions creates bizarre incentives for people who’ve decided they’ve lost their passion or interest in what they’re doing to stay on the job. We should want a world where a guy who’s been a cop for twelve years and done a good job, but doesn’t really want to do it anymore just looks for another job and moves in. Instead, he has a lot of incentives to stay on for eight more years doing a really half-assed job in order to get the pension money that will otherwise vanish. Similarly for teachers. An awful lot of public sector functions, at the end of the day, work much better if you have properly motivated people. People doing work for purely cynical “I want to get money” reasons should really be encouraged to go work in the cynical “we’re trying to maximize profits” sector of the economy. But giving people generous pensions, instead of higher salaries, encourages the reverse.

Then by the same token, the knowledge that a lot of the monetary value of public sector work will only accrue if you stay on the job for a long time deters people from entering the profession in the first place, and also deters them from shifting from city to city. One strength the military has going for it is that it’s created a robust notion that there’s nothing wrong with signing up, serving competently for a few years, and then moving on with your life. People who do that are “veterans” not “quitters” —it makes the military mesh well with the modern private sector economy.

There’s no real upside for citizens or for employees. Instead there’s only the apparent upside that it looks cheaper on the budget to promise people a big pension 20 years from now rather than a raise tomorrow. Those savings, however, are entirely illusory as we’re about to find out when it turns out that a lot of state and local funds can’t cover their promises.

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