The populist case for pension reform

 San Francisco, the most liberal and pro-union big city on the west coast is now the flashpoint for the debate. It pits a Democrat elected official, public defender Jeff Adachi, and his civic group San Franciscans for SMART Reform against the unions who still have the backing of most of the local political establishment. Adachi has crafted a ballot measure (Proposition B), which increases the percentage of pay city employees must contribute to their retirement funds and family’s health coverage. These changes are projected to save the city approximately $170 million per year. If left alone San Francisco’s pension costs are estimated to swell from $525 million to $812 million by 2015.

The potential for gargantuan retirement payouts to sabotage government services resonates with socially-conscious San Franciscans. Michael Moritz, a technology investor who is supporting Prop B, summed up this populist sentiment to the New York Times: “San Francisco’s self-employed, restaurant workers, janitors, carpenters, small merchants, house cleaners and freelancers who work every bit as hard as city employees but do not enjoy similar pension or health care benefits now face the further indignity of watching vital civic services get axed in order to meet these obligations. It’s not right, fair or reasonable.”

This populist push to get public workers to let go of some of their benefits for the common good is rupturing Democratic politics. State and local leaders with the same problem as San Francisco’s are breaking ranks with unions to start bringing public employee compensation down to earth. Mayor Antonio Villaraigosa is doing so in Los Angeles, Dave Bing in Detroit, and New York Attorney General Andrew Cuomo is making his fight against pension “padding” a central theme in his gubernatorial campaign. Democratic politicians are not only responding to dire financial forecasts, but are also wary of popular backlash against the exorbitant level of benefits dished out. According to the New York Times, about 3,700 retired public employees in the Empire State are collecting pensions in excess of $100,000. In California, the tally is over 15,000 pensioners.

The unions are not taking this lying down. Former Clinton White House political fixer Chris Lehane has been brought into San Francisco, where he is trying to use public safety workers – who represent about 20 percent of those who would be affected by Prop B – as PR leverage. “I’m not sure taking on firefighters or police officers is the smartest route to political success,” he told the Chronicle. “You might as well take on Mother Theresa while you’re at it – and call for Tim Lincecum to be traded to the Dodgers.”

But there are no sacred cows anymore. The growing public awareness of lavish pension payouts and their risk of creating a public finance catastrophe have already prompted previously-unthinkable reforms. In California, Gov. Arnold Schwarzenegger has struck deals with six major public employee unions to make new workers contribute more, and is now pushing to undo the state pension structure devised in 1999. Gray Davis, the Democratic governor who lost his job to Schwarzenegger in a recall election, is backing him on it. Earlier this year New Jersey Gov. Chris Christie and the Democratic legislature made an end-run around the state’s unions with legislation that rescinds a benefit increase for new workers, moves part-timers into a defined contribution plan and makes current employees pay for part of their health care.

As politically impressive as these reforms have been, they don’t go nearly far enough in fixing the pension problems in California or New Jersey: When accounted for actuarially, the two states face staggering unfunded liabilities of approximately $500 billion and $173 billion respectively. They are joined by about 18 other states with steep deficits, which all together comprise $3 trillion in unfunded liabilities across the country. States and localities will have to become bolder in confronting the problem, and it won’t be fixed for good until defined benefit systems are replaced with the defined contribution, 401(k)-style systems that the federal government adopted long ago.

The populist appeal of restructuring public employee pensions – because it benefits the people as a whole rather than a special interest of highly-paid government workers – is the glue that will sustain bipartisan cooperation for reform. This will likely have more staying power than the pressure the unions can apply in defense of maintaining outsized benefits. It is up to state and local leaders around the country to get in front of this tailwind and preserve their government services for everybody, rather than sacrificing them for the select few.

Danker is the project director for economics at American Principles Project, a Washington, D.C.-based political advocacy organization.