October 11, 2015

Pension And Medical Benefits

In my last blog, I commented on a July 11 article by Mary Walsh of the New York Times on the crisis relative to horrifically large pension and retiree medical obligations for government employees.  Coincidentally, as I traveled to and from Europe between July 15 and 20, I had an opportunity to catch up on reading, and I read Roger Lowenstein’s great book While America Aged.

In this book, Lowenstein details the history of three out-of-control pension and retiree medical commitments, thecommitment by the Big 3 automakers to their employees and retirees, the commitment to the Transit Workers Union and other municipal unions in New York City, and the commitment to San Diego’s municipal workers.  He draws broader conclusions from these analyses, consistent with Mary Walsh’s.  As Lowenstein puts it on page 1:  “America has a crisis of epidemic proportions.  The fabric of the nation’s pension system is collapsing – at the very moment when the American population is rapidly aging.”

I agree with Lowenstein’s conclusion, and I also agree with some of his key recommendations.  Most importantly, we need to apply private pension and retiree medical accounting to state financial statements.  Today, while governments are expected to size their obligations in total, they are not required to set aside money every year to pay for a portion of the long-term commitments they have made.  They are only required to cover the current year’s obligations in a pay-as-you-go system.  As noted in my last blog, private sector employers had to change to a full accounting of pension benefits on their income statements in 1987, and to a full accounting of retiree medical obligations in 1993.

While I agree with Lowenstein’s recommendation that there be a form of universal health care that combines benefit requirements for the elderly with those of people of all ages, I do not agree that it should be managed under the same system as Medicare or Medicaid.  Throughout his book, he eloquently talks about the many pressures brought to bear on elected officials to do something popular today, such as keeping down current-year expenses, while mortgaging the future.

Unfortunately, much of what is required for a sensible health care system requires decisions to invest in health today to reap the benefits in future years.  For example, preventive screenings, immunizations, outreach to increase adherence to chronic disease treatment plans, and programs for youth health and fitness are great medium and long-term investments, but almost never is there a current fiscal year payback.  Therefore, any universal health care system that operates on annual budget cycles is likely to be subject to the same pressures as the corporate executives and government officials Lowenstein describes.

Moreover, just as Lowenstein described special interests that interfered with objective decision making in the San Diego and New York situations, health care has great potential for special-interest decision making, as evidenced by the power of medical lobbies to drive for coverage mandates that are highly-specific and often not justified by best-in-class health care.

If we are to have universal health care supported for underserved groups by the government, it is imperative that we construct a system that is not susceptible to annual cost reduction pressures.  Similarly, as Lowenstein recommends, any system needs to have highly-transparent analysis of the longer-term consequences of any major decision, since short-term savings often breed significantly higher long-term costs.

What shocks me most about these issues relative to government employee retirement obligations is how little attention is paid to them in the popular media.  Mary Walsh and Roger Lowenstein deserve credit for the courage of their convictions in dealing with a “dirty little secret” about the massive and often unintended wealth transfer from a large number of taxpayers to a small number of government employees.

I do not blame the employees or their union leaders for demanding rich benefits, because the leaders are expected to be strong advocates for their members, although they need to insure that pension trusts are appropriately funded.  However, I believe that we need to hold elected officials accountable for responsible decision making in the area of legislated or otherwise bargained-for employee benefits.  I also believe that our media do not do a good job educating the public on this issue, because, except for a situation like New York’s (where there was a major transit strike three years ago) or San Diego (where the city basically lost its ability to access the bond markets because of financial insolvency caused by under funded pensions) it is a crisis in slow motion, rather than a single dramatic event.

We must demand more relative to how our tax dollars are spent!!