Public sector health benefits: Civil War II?

As a kid learning about the US Civil War I remember being particularly moved by the fact that it divided a lot of families who had some members on one side and some on the other. It’s not as dramatic and isn’t violent, but the fight over public sector benefits, especially retirement health benefits, has some of the same characteristics. In Pension Issues Spice Dinner Debates the Wall Street Journal examines how those who enjoy generous government benefits are facing off against those who don’t. It would be a serious enough issue if it were simply a matter of jealousy, but those sounding the alarm are also upset that these obligations are sapping municipal and state finances.

“I don’t expect guarantees from my employer,” says Ms. Izzarelli, 50 years old, an internal auditor of private pension plans at a firm in White Plains, N.Y. “When they hit hard times, I wouldn’t expect them to carry a lot of benefits that they can’t afford. I don’t think public workers ever look at the world that way.”

She didn’t have a receptive audience. Her two brothers are Connecticut state troopers, her father is a retired state trooper and her brother-in-law is a corrections officer…

Ms. Izzarelli’s father, Sam Izzarelli, 72, says that as a taxpayer he understands his daughter’s point about the cost of benefits and pensions, but thinks the state has to “honor the contracts that they have made in the past to people like me.”

This is more than just an academic question. As the Massachusetts Taxpayer Foundation reported earlier this week in Retiree Health Care: The Brick That Broke Municipalities’ Backs:

The 50 largest cities and towns in Massachusetts face a crushing $20 billion liability for retiree health care benefits that threatens to wreak havoc with local government services.

The report shows that many communities would have to raise taxes by 50 percent or more just to pay for unfunded liabilities. I worry a lot that the benefits structure in my town harms services already and that the crush will make things much worse in the future.

There’s no easy solution, but there are a few things that can be done:

  • Face up to the issue and make it clear just how serious a problem we are talking about. Kudos to the Massachusetts Taxpayer Foundation for doing some of that
  • Don’t cancel the health benefits, but pare them back to levels that are comparable to what the private sector provides. That means using modern managed care approaches that control costs without sacrificing quality
  • Reduce benefits for new hires
  • Substitute capital for labor, which will be easier to do once the full cost of a hiring a new employee is calculated

It’s true that governments have been foolish in how they’ve negotiated with public sector workers and haven’t been honest with the citizens about cost. And I understand why public sector employees and retirees think they deserve what they’re getting. In the business world, unsustainable labor agreements are sometimes resolved through bankruptcy or the threat of it. Better to deal with the issues now rather than getting to that scenario with municipalities and states.

February 18, 2011

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