Pensions and Good Governance

Mayor Slay’s proposal to modify the pension plan for the City of St. Louis Firefighters Union has led to competing ads attacking and supporting the proposal. The issue is emotionally charged and the city has an obligation to fulfill promises made to retired and current firefighters. However at a basic level the Mayor is right – Pensions are bad governance.

The right wing is certainly attacking government unions as a proxy in the battle over the size and role of government. But the question of whether governments should provide pensions to government workers or 401K retirement contributions is a separate question – it has more to do with integrity of the budgeting process than with the question of how big government should be. Regardless of its size, government spending should be transparent – we should be able to know how much money is being spent on the government services we are receiving. Pension commitments are not transparent.

The amount of money that should be contributed by government to a pension fund each year to pay for the future obligation is at best a series of guesses – a guess on the investment returns of the pension fund, the life expectancy of the retirees and the consistency of the pension rules. Politicians have a long history of over-estimating investment returns, allowing them to put less money from the current budget into the pension fund. Life expectancy keeps increasing. And the application of the pension rules are at least partially in the hands of the people receiving the pensions and are rife with opportunities to game the system. This could be by giving an employee a promotion right before they retire or by finding a medical condition that justifies an increased pension. As an example, 40% of the retired firefighters in the City of St. Louis are on disability and so receive a higher pension payment.

This is not just to point fingers at the pension administrators – politicians are usually complicit. Looking the other way while the system is gamed buys labor peace now with a commitment that will be paid by future generations. It’s not unique to pensions – it’s always easier to agree to pay more if you are paying with someone else’s money.

This, ultimately, is why pensions are bad governance – because of the lack of transparency and opportunity to game the system they allow us to pay for government services that we receive this year with a future commitment – they allow us to force our children and grandchildren to pay for our government. We readily acknowledge that deficit spending is stealing from future generations. Pensions are often the same – a promise that a future generation will pay so that we can pay less now. By any measure this is a generational cost shift, and it is unfair.

Pointing out the danger of pensions isn’t an attack on unions or an attempt to sneakily cut the size of government. It’s just an acknowledgment that we as a society need our government to behave responsibly. A primary role of government is to protect the interests of future generations as well as the current generation. Governments should still certainly contribute towards employees’ retirement, but it needs to be an actual cash contribution, out of today’s dollars, not a promise that our children will have to fulfill.

Yes, the City of St. Louis has made promises to retired and existing fire fighters and needs to keep those promises. But much of what the Mayor is proposing is just an effort to more accurately account for the cost of pensions – it is an attempt to increase the integrity of the governance process. Again, this isn’t a question of the size of government. Whatever size we decide government should be, it should be able to provide an accurate accounting of the costs being incurred and we should never pay for current services with future dollars. It’s just not fair to future generations.

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