The pension time bomb - unethically high pensions of government employees

Washington Monthly, Jan-Feb, 1995 by Gareth G. Cook

To judge by the last election, most Americans can only smile at the thought of an unemployed congressman pounding the pavement in search of work. Others might feel a slight twinge of empathy for the suddenly jobless. But few suspect what every congressman knows: Thanks to an extremely generous pension program, many retiring members can live very well, at taxpayer expense, without lifting a finger.

Consider fallen House Speaker Tom Foley. According to the National Taxpayers Union Foundation, his lifetime pension will start this year at $123,804. Multi-millionaire Dennis DeConcini, retiring under the cloud of the Keating Five S&L scandal, will take in $55,669 this year. And Dan Rostenkowski, longtime chairman of the powerful House Ways and Means Committee, can expect his checks to start at $96,468 per year--and they will continue uninterrupted even if he is convicted of all the corruption charges on which he was indicted last year.

But the real surprise is that these are not examples of congressional perks gone mad. Many federal employees--and some state and local workers--are treated to pensions far more lavish than those of their counterparts in the private sector. So generous are government pensions, in fact, and so poorly are they financed for the future, that, absent serious reforms, the eventual price tag could trigger a financial crash that will make the S&L crisis look like a Big Wheels pile-up at the local playground.

Already, ballooning retirement payments are squeezing the very programs for which the government was established in the first place. Last year, for instance, pension checks for retired federal workers and military personnel ate up $65 billion. That's enough to fund the entire 1994 budget for welfare, education, and the National Endowment for the Humanities. Add to that the total cost, over five years, of the crime bill. And then add everything we spend on foreign aid and highways. You'd still have a ways to go.

It is the future, though, that is truly worrisome. In the good old days, a pension plan meant solemn accountants carefully putting aside and investing money so there will be enough when all the retirement checks start coming due. Put in the language of the green-eyeshade set: Without prudent investments, made with every pay period, public and private plans accumulate substantial "unfunded liabilities." And the government does not come close to investing each year what it needs to, and its unfunded liability--the bill that future taxpayers will get for today's public servants--is frighteningly large.

For federal employees, according to the Employee Benefit Research Institute (EBRI), unfunded liabilities have already hit $870 billion dollars. If you also include military retirees, total unfunded liabilities of the federal retirment system--money that has been promised but is not there--are now $1,497,000,000,000. If the federal government used the same accounting conventions as private businesses, the entire federal debt would jump, overnight, by a full third.

Though it is by far the worst offender, the federal government, unfortunately, does not have a monopoly on pension problems. According to a 1993 study by Wilshire Associates Inc., 28 states suffer from underfunding. More than 10 states are in serious trouble with less than 80 percent funding of their liabilities. Massachusetts has a $6.3 billion shortfall. West Virginia holds top unfunded honors with only 33 percent funding. According to a comprehensive survey conducted by Paul Zorn of the Government Financial Officers Association, states and localities have quietly put together unfunded liabilities of $164 billion.

Taken together, then, politicians have already indebted the next generation of taxpayers to today's government workers for nearly $1.7 trillion. But you would be hard-pressed to find a voter outside a few elite consulting firms who has any idea. "The public is ignorant," agrees Sylvester Sheiber, a former deputy director at the Social Security Administration and now research director of Wyatt, Co., a Washington, D.C. consulting firm. "And there's a reason for that: The people who've made these promises don't want the public to know."

The public will figure it out, though, as poorly run pension plans start to threaten critical services. In the Lilliputian District of Columbia, for example, the last few decades of generous pension promises have pushed unfunded liabilities to a giant-sized $5.5 billion, even as its operating budget has plunged deeper into the red. Along the streets, uncollected trash is a feast for rats and squirrels, but for the District's denizens, sad to say, it is a sign of things to come. As taxes have gone up, people have fled, leaving the pension burden on those who stay. Paying off D.C.'s pension liabilities would now require more than $9,000 from everyone still living in its borders.

With the government's own pension programs careening toward disaster, it is ironic how much energy is spent blaming private plans. Every fall, the federal government's Pension Benefit Guaranty Corporation releases a list of the 50 worst corporate offenders, outlining the billions for which they have not provided. Total private-sector underfunding, the PGBC reported last month, has now hit $71 billion. That is certainly a problem. Taxpayers should not be asked to bail out pension programs that have failed to plan for the future. But the potential bill from the federal government alone is 20 times larger.