[Solution]A Case Study The Plight of Public Employee Unions and Public Pensions

In his first of many bestselling books on economics, American Capitalism: The Concept of Countervailing Power (1952), John Kenneth Galbraith put forth his theory that…

In his first of
many bestselling books on economics, American Capitalism: The Concept of
Countervailing Power (1952), John Kenneth Galbraith put forth his theory that
when one group gets too powerful in a pluralist free society such as the United
States, another group or coalition will spring up to counter or oppose its
power. This is exactly what has happened to the public sector union movement;
it grew to be so successful that it inspired a counterrevolution in the
treatment of unionized public employees.

Just how
successful have they been? A few statistics and a line graph will tell the
tale. In 1960 31.9 percent of private sector employees belonged to unions
compared to just under 11 percent of public sector employees. Fifty years
later, in 2013, reflected a radically different reality: only 7.5 percent of
the private sector was unionized while 38.7 percent of the public sector was.

That 38 percent
average needs a few qualifications as the Figure illustrates. First, the
percentage of public sector workers has actually declined by 15 percent since
1983—when it was over 45 percent, primarily because of the decrease in the
number of postal workers. Nevertheless, federal postal workers still have the
highest rate of coverage (over 67 percent) while other federal workers are only
at 20 percent. Remember the largest preponderance of federal workers are in the
top grades (managerial/top professional ranks) of the civil service. Again
using the 50 year (1962–2012) comparison, in 1962, 52 percent of federal
workers were in the lower grades (GS 1–6) compared to 25 percent in the highest
grades (GS 11–GS 15/SES). In 2012 only 17 percent were in the lowest grades
while over 58 percent were in the highest grades. Local government workers are
at 50 percent, composed mostly of teachers and protective services.

11.4 Percent of Workers Covered by a Collective Bargaining Agreement, 1983–2013
Source: Barry T. Hirsch and David A. Macpherson, Union Membership and Coverage
Database from the CPS, available at http://www.unionstasts.com.

What happened to
cause this reversal? Simply put: as traditional unionized rust-belt industries
(autos, coal, rubber, steel, etc.) needed fewer workers due to automation and
foreign competition, the service sector that took up the slack in employment
numbers was far less hospitable to unions. Meanwhile, the public sector unions
were taking full advantage of their natural monopoly and rapidly expanded their
numbers, their scope of bargaining, and their political influence.

While many issues
(pay, tenure and job security) are associated with the rise of public employee
unions, none is more prominent than pensions. It is generally true that
government jobs in large jurisdictions offer significantly greater fringe
benefits than most private companies. While one could hardly claim to justify
aristocratic advantages on the basis of a few more holidays or sick leave,
government pension plans provide an example of the significant advantage that
public employees enjoy that are not shared by workers in the private sector.
For example, almost all (90 percent) full-time government employees at all
jurisdictional levels are eligible for lifetime pensions. This compares to 18
percent of employees in the private sector (US News, October 2010). As public
sector unions grew in numbers and influence over the last 50 years, the gap
between total remuneration (pay and benefits) has continued to widen. This
disparity, increasingly noticed, has, with the help of Republicans and the Tea
Party, helped to fuel this counterrevolution.

When pension plans
for government employees began to emerge during the second and third decades of
the twentieth century, their rationale was quite logical and simple. In the
absence of such programs, there was a tendency to retain on the payroll
employees who were too old to perform their normal duties. Since it is not a
social tendency to reward many years of faithful service with dismissal,
employees frequently remained on the payroll as a matter of gratitude. At a
time when state, county, and municipal political machines almost always kept a
variety of their stalwarts on the payroll with “no-show” jobs, this practice of
compassionate corruption was neither unreasonable nor unparalleled.

The drawbacks of
retaining decrepit employees notwithstanding, it was observed that it was both
kinder to the employee and cheaper for the taxpayer to provide pensions for
those grown old in the public service. What started out as a measure to provide
for the old age of public servants has, several generations later and in too
many cases, turned into a rip-off of the public treasury.

The public is
generally aware of pensions at half-pay after 20 years for members of the armed
services. Paralleling the military pension program are the civilian
paramilitary organizations such as police and fire departments. Again, the
rationale for a retirement plan providing for half-pay after 20 years of
service is supplied by the inherent dangers and physical strains of such work.
The dangers that police officers and firefighters face are certainly real.
Nevertheless, it is the individual sanitation worker, the trash collector, who
is more likely to be injured on the job. Admittedly, however, few sanitation
workers, in contrast to police and firefighters, have had occasion to die in
the line of duty.

In many
jurisdictions, pension benefits are not simply computed on the basis of one’s
salary, but on the basis of one’s total earnings during the previous year or
two or three. Consequently, it is possible for an employee who worked a great
deal of overtime during his twentieth year on the job to retire with up to
three-quarters of his base pay. Such public largesse is no longer limited to
military and paramilitary services. With the advent of aggressive public
employee unions in the 1960s, an ever-increasing number of public servants in
all categories of employment gained the privilege of retiring at half-pay after
20 years of service. But because of the method of computation, the general
impression of merely half-pay benefits is often misleading.

In stark contrast
to the situation in the larger jurisdictions, retirement provisions for public
employees in many smaller jurisdictions are sometimes grossly inadequate. But
the trends established by the larger jurisdictions are unmistakable. The United
Auto Workers was delighted to have achieved a 30-year retirement program at
less than half pay in 1973, when at the same time some large municipal
jurisdictions had as a reality a 20-year retirement program at half-pay or more
for most, if not all, of their employees. All this had been achieved in many
larger jurisdictions in just over a decade of municipal union militancy.

Such remarkable
success was due in large part to the “hidden” nature of pension benefits. Since
such monies tend to come out of future budgets, the incumbent executive can
frequently bring himself labor peace at the price of a fiscal headache for a
future incumbent of his office—not to mention taxpayer gouging. Union members
have been quite willing to accept “smaller” salary increases in exchange for
increased pension benefits. They could hardly have made a wiser financial

As unions
continued to win, to gain more and more advantages for their members, it was
inevitable that at some point politicians would develop the political will to
challenge them in the political arena. This finally happened in a big way and
in many parts of the nation at the same time in 2011. There were two pressing
reasons for this counterrevolution: the sheer expense of union dominance and
the fact that the public sector unions had overwhelmingly aligned themselves
with the Democratic Party. Consequently, when Tea-Party-supported Republican
Party stalwarts gained control of both the governor’s office and the state
legislature in states such as Wisconsin and Ohio, they took the opportunity to
both punish their political opponents and put their state’s finances in better
fiscal order by reducing both union political influence and their members’
financial benefits. For example, Wisconsin and Ohio reduced public employee
bargaining rights for most employees. Consequently, pensions and health care
would no longer be bargained over. Suddenly employees who contributed little or
nothing for those benefits had to make substantial contributions out of their
own pockets in order to save their state’s fiscal health—and as punishment for
supporting Democratic candidates.

The future nature
of public employee pensions is obvious and is already becoming apparent in some
jurisdictions; it portends multi-tier pension benefits for public employees.
Defined-benefit plans, the traditional pension, will gradually be supplanted by
defined-contribution plans. Those who have been in the system for a substantial
period retain their generous defined-benefit plans. Those who entered more
recently may have a less generous defined-benefit plan, meaning they must work
more years for full benefits. Finally, the newest hires may not have a
defined-benefit plan at all but will instead have modest contributions made to
a 401(k)-type plan.

Three things seem
certain as we enter the brave new world of constrained public sector finances.
First, as is already the case in many jurisdictions, new employees will have
their pension benefits severely constrained compared to their older coworkers
who got there first. And this will be done with the compliance of the unions
who are naturally more interested in protecting the benefits of current
employees at the expense of future ones.

Second, there will
be fewer and fewer traditional pensions for new employees. A modest pension
might be combined with a 401(k)-type plan. Hybrid plans like this have already
been adopted by the state of Utah, Orange County, California, and Atlanta,

And third,
employees with these new-style 401(k) plans will be obligated to manage their
own pension assets, for all the good and ill that this portends. After this
becomes commonplace, public employee pensions will be pretty much the same as
those in the private sector where traditional pensions have practically
disappeared. But this will happen gradually and not without a fight. But you
cannot fight arithmetic. And the arithmetic clearly suggests that the
traditional defined-benefit union-negotiated pension may eventually disappear.

For Discussion: Do
you think public employees run a risk of becoming more isolated from private
sector workers who don’t have pensions and aren’t in unions? What do you think
of the unions using legal challenges in court as a primary strategy to achieve
their goals?
The post A Case Study The Plight of Public Employee Unions and Public Pensions

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