Chuck Beckwith’s column competently lays out all the usual public employee arguments justifying their opulent pensions. A cursory review of the logic reveals just how breathtakingly flawed this reasoning is.
First and foremost: His core point is that pensions provide economic stimulus. This is the classic “Broken Window Fallacy.” Essentially, “If I break your window and you have to pay to repair it, that stimulates the economy and we’re all better off.”
The fallacy is this omission: What would you do with your money if the window wasn’t broken? Beckwith’s inference is that you’d burn it. I suspect that such is not the case.
Instead, it’s likely you’d spend your money on something ELSE – something you wanted to buy. So if the window is broken, you’d spend your money repairing it, but have no net improvement in your life. If the window is not broken, you spend your money on something you want — and your window is still intact.
It gets worse. As I’ll demonstrate at the end of this article, even the insane idea of breaking windows is a better stimulus policy than our deeply flawed defined benefit pension plans.
The pension variation on this fallacy that Beckwith presents is that it creates wealth via investing your money in other people’s pension plans for many years. But again, what would you do with the money if you got to invest it yourself? For individuals, retirement investing is dependent on having money to invest! If you are paying high taxes for government pensions, you have less to invest in YOUR “pension.”
Stated differently: Taking your retirement capital and investing it in government pension programs costs you not only your money, but the investment return on your money over those same years. Stated differently, a one dollar increase in your taxes can cost you FIVE dollars (or more) of your retirement fund.
There are other problems with Beckwith’s argument. For instance, he presents California as a collective – we all benefit from these pensions and high government pay. But we live in LOCAL communities, and the effect is usually quite different than claimed.
Consider extremely low income National City. Last time I checked, it had 42 highly paid, well pensioned firefighters. Only ONE actually LIVED in National City (the chief). Most of the rest live in North County, East County and other counties. The giant sucking sound you hear in National City is their city payroll being spent elsewhere.
Oddly enough, a similar though less dramatic pattern can be found in just about ALL cities – rich or poor. The better paid public employees (and especially firefighters who commute to work on only 7-8 days a month) often choose to live in more rural outlying areas where their housing dollar provides more bang for the buck. It just makes sense. Hence the stimulus effect of this tendency does benefit some more rural areas – at the expense of the people PAYING the salaries and pensions.
Another consideration: Too many retiring California state and local government employees choose to leave the state for other places where their money goes further. Again, an understandable decision. Just about ANY other state offers such an improvement.
But when these retirees leave California, under federal law their pensions are no longer subject to the California income tax. So the irony is that often the very folks whose unions pushed hard to make California a very high tax state choose to leave the state once they are retired – in part to avoid those high taxes. I don’t find that very stimulating.
As to Beckwith’s argument that we individuals can’t get the great deals and low costs of CalPERS, that’s total nonsense. My family’s IRAs incur a TOTAL cost per year of a tad over 0.05%. That’s ONE TWENTIETH OF ONE PERCENT. To give you some feel for the magnitude of difference, that’s ONE TENTH the CalPERS fees/management percentage of 0.51% – and that figure likely doesn’t count the costs paid by the taxpayers for overhead for CalPERS, STRS, etc.
We use index mutual funds, available to anyone and proven to be a superior choice compared to active management investing. If we Californians want to restrict the investment options in government 401k’s so people don’t run up costs or gamble too much, we limit such investing to such boring but cost-effective index fund choices.
And finally, in his ode to CalPERS pensions, somehow Beckwith “overlooked” the one trillion dollar elephant in the room – the unfunded pension liability. Talk about breathtaking! To state the obvious – when that very real obligation — whatever the amount– comes due for all those underfunded defined benefit plans (state and local), it is 100% the responsibility of taxpayers.
Coming back to the Broken Window Fallacy – when one considers this unfunded pension liability, it actually makes breaking windows an attractive stimulus alternative! That’s because once you pay for the broken window, there’s no huge unexpected bill for it showing up years later. Such is the nature of our underfunded pensions.
All that being said, CalPERS and STRS pension ARE an effective stimulus – for the people receiving those pensions. For everyone else? Not so much.