Wayne O'Leary

The Pension Grinches

The September headline in The New York Times said it all: “Democrat Defies Labor.” Defying labor has become almost a regular pastime for officeholders and candidates in the party of Roosevelt. Democrats don’t defy business, especially corporate business; that’s too dangerous. Defying labor is another matter altogether, because up to now, it’s been cost-free.

The subject of the headline in question, Rhode Island state treasurer and current Democratic gubernatorial nominee Gina M. Raimondo, is Exhibit One for this election year. Raimondo’s major prior claim to fame was as an entrepreneur credited with starting Rhode Island’s first venture-capital firm. She’s highly educated (Harvard, Oxford, and a Rhodes Scholar); however, that education didn’t produce a political progressive, but rather a business-oriented centrist motivated to impart “tough love” to her constituents.

Like other prominent centrist Democrats (New York Gov. Andrew Cuomo, Chicago Mayor Rahm Emanuel), Raimondo has made pension reform her calling card — pension “reform” as in cutting pensions for public-sector workers. Since 2010, this has become a well-trod path for conservative Republican governors, but now Democrats are jumping on the bandwagon. In Raimondo’s case, she used fears of a looming pension-funding disaster to gain the Rhode Island state treasurer’s office in 2010, then proceeded the following year to persuade the Democratic legislature and Independent Gov. Lincoln Chafee to enact what’s been called one of the most comprehensive pension overhauls in the country.

The controversial plan originally called for suspending COLAs (cost-of-living adjustments) pending a restored pension fund, delaying state retirement until age 67, and increasing pension contributions by workers; when (and if) reinstated, COLAs would be based solely on returns from pension-fund investments on Wall Street. Most radically, state employees would be shifted from the customary salary-based “defined-benefit” plan to a 401(k) “defined-contribution” scheme of the sort favored by corporate employers in the private sector, thereby putting Rhode Island in the same class as Florida, whose Republican Gov. Rick Scott had also replaced genuine public pensions with investment vehicles.

An immediate legal challenge led by the American Federation of State, County, and Municipal Employees (AFSCME) and the Service Employees International Union (SEIU) resulted in federal mediation and an eventual settlement last February, subject to union and pensioner approvals. Raimondo and the pension hawks were forced to back off somewhat and compromise. COLAs will be reinstated, even if Rhode Island’s pension system is less than fully funded, and they will no longer be based entirely on Wall Street’s manic fluctuations, but equally on the Consumer Price Index. Retirement will be allowed at age 65 instead of 67, and (most significantly) employees with 20 or more years of service will be able to move back into a defined-benefit pension plan.

Despite the endorsement of a gratified leadership, rank-and-file public-sector union members remain less than thrilled — with Raimondo and, by extension, the Democratic Party. The state treasurer enters the general election having received the primary support of only 42% of her party; the head of one SEIU local questioned her credentials as a Democrat and characterized her positions as “more business-friendly and less middle-class friendly.” However, in a beggar-thy-neighbor scenario reminiscent of Wisconsin Gov. Scott Walker’s recall election, some private-sector unions, notably in the building trades, backed Raimondo. Divide-and-conquer is alive and well.

In some respects, the reprehensible Republican-lite approach to pension policy adopted by Democrats like Rhode Island’s Raimondo is encouraged by irresponsible government policies in other areas. There is undoubtedly a very real pension crisis. A total of 34 states are funding their public-sector pensions at under the federally recommended minimum of 80%, according to the Pew Center on the States, up from 22 states in 2008; only one of them has fully funded its pensions — that is, set sufficient money aside for the projected cost of benefit payments. Depending on assumptions regarding pension-fund investments, average underfunding nationwide is anywhere from 27% to 52%, and according to The Economist, estimated state liabilities combined range from $1 trillion to $4 trillion.

Any way you measure it, there’s a problem, and in response, 43 states have either increased worker contributions or reduced pension benefits over the past six years; a majority (26) have done both, spurred on by unscrupulous politicians like Gov. Chris Christie (R-N.J.), who claims the US at large is about to become Detroit pensionwise. Christie knows better; he also knows states could defang the pension beast by simply raising income taxes. But Republicans and copycat Democrats won’t do that, preferring to renege on binding pension promises because, well, state retirees (who, in California, average all of $29,000 in annual benefits) have just had it too good for too long. And anyway, no one should have to pay taxes.

If conservative governors are the most high-profile protagonists in the movement to roll back defined-benefit public pensions, which they regard as unnecessary entitlements, there is plenty of blame to go around. In fact, the leading threat to public pensions may well be the Federal Reserve Board in Washington. Its ongoing regime of radically low interest rates, a form of financial repression begun in 2008 by Chairman Ben Bernanke and endorsed by his successor Janet Yellen, not only savages senior savers, but pension funds as well.

By forcing the prime lending rate down to near zero to keep corporate borrowing cheap (in the forlorn hope of stimulating accelerated job growth), the Fed also reduced the return on low-risk Treasury bonds state pension funds have traditionally used to finance their annual benefit payouts. This, in turn, prompted pension managers to recklessly dabble in stocks and even riskier private-equity and hedge funds with outrageous financial-management fees, in order to make up the difference. In an environment of market crash and recession, the result was, and is, selectively catastrophic.

So, who’s to blame for the pension crisis? The answer is threefold: (1) state governments that failed to contribute annually to their pension systems as required by law; (2) pension funds that foolishly elected to gamble state monies in the stock market or in hedge funds; and (3) a Federal Reserve that heedlessly starved state pension funds through doctrinaire low-interest policies. Here’s who’s not to blame: America’s public-sector workers, who are nevertheless being asked to sacrifice.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy.

From The Progressive Populist, November 15, 2014