How the geezers cashed in on the Gulf War; and why you'll pay for it

Washington Monthly, Nov, 1991 by Edward Ericson

Today, with a barrel of crude going for about $22.50, the Gulf war and its oil shock seem like ancient history. But some things aren't so easily left behind. Last year the government had estimated its COLA would be 3.9 percent. Thanks to the oil hike, it ended up paying 5.4 percent-the biggest increase in nine years. "The oil and gas increase had a cost that nobody has recognized," says Ed Herman, professor emeritus of the Wharton School of Business. "And this fed into the budget in ways that nobody has paid any attention to."

Hyper-pension

Why should attention be paid? The numbers speak for themselves-and those numbers were bad enough before the oil shock. In the civil service and military, the "unfunded pension liability" (the amount by which scheduled pension benefits exceed workers' contributions) now exceeds one trillion dollars. That's a debt all of us will eventually have to pay, through increased taxes or decreased spending.

The original rationale for decent pensions for government workers was noble: In exchange for what were then relatively meager salaries, workers could count on a comfortable, federally funded dotage. But as government salaries crept up in the seventies and eighties, pensions also kept on creeping. Today, the average civil servant can expect to earn two and a half times as much in retirement as a private pensioner, who, according to the Employee Benefits Research Institute, generally receives no adjustment for inflation at all. Yet after so many years on the gravy train, civil servants began looking at generous pensions not as compensation for low wages, but as a fundamental right. Inevitably, the annual cost-of-living increase became an intrinsic part of that expectation.

While few people bother to question it anymore, the illogic of COLAs is three-fold. First, they aren't applied year after year to a base pension figure, but are compounded annually, COLA on top of COLA. Say you start with a $20,000 base pension, to which a $3,000 COLA is added. The next year, the base figure is $23,000, not $20,000; your adjustment is a percentage of the higher figure-a difference that adds up. Second, and worse, COLAs are applied across the board to all pensioners, no matter how lavishly provided for. COLAs make great sense for the career GS-5 whose pension barely covers his apartment and cat food; in that case, an annual adjustment protects him from real economic misfortune. Problem is, Ted Kennedy will get exactly the same adjustment, even though he'll get a pension of $1 1 1,000 a year if he quits the Senate at the end of this term. With a trillion dollar liability, a $279 billion deficit, and tremendous social needs going unmet, that sort of "fairness" simply isn't fair.

Finally, COLAs are a self-fulfilling prophecy. When inflation prompts a rise in COLAs-as it inevitably does-it starts a chain reaction that leads to higher inflation, economists argue. "COLAs mean higher wages, and higher wages lead to inflation," says Laurence Ball, a Princeton University economist. "Simply put, COLAs magnify inflationary shocks."