The Changing Politics of Public Sector Pensions
[Editor's note: Tomorrow, Daniel DiSalvo will be taking part in "Save Our Cities: Reforming Public Pensions to Protect Public Services," a conference sponsored by the Manhattan Institute with RealClearPolitics. Readers can watch the conference via livestream from 10 a.m. to 2:30 p.m. at this link.]
From the 1980s until the Great Recession, the politics of public-sector pensions in most states and cities were relatively stable -- and conducive to increasingly generous benefit schemes. Since 2008, though, the political landscape has changed dramatically.
The old politics of pensions could be described as follows. Maintaining political alliances with labor unions and public employees, Democrats favored more generous benefits. Republicans tended to go along -- in some cases they also had ties to unions, but mostly they played ball because there was little pressure to oppose expansion. The issues were technical; the public was uninformed and uninterested. Problems appeared far off in the future. The unions had the political playing field to themselves. Raising red flags about pension costs paid few political dividends.
All that changed in 2008. The recession revealed both the lavishness of many pension plans and the extent to which they were underfunded.
In the new politics of pensions, the Democrats are divided. Many of those holding office, especially mayors and governors, are concerned about how pensions are squeezing everything else in their budgets. They are open to reform, and sometimes they're leading it. Other Democrats -- especially those who serve in city councils and state legislatures and have close ties to public-sector unions -- remain opposed to reducing the generosity of pensions.
Republicans are facing pressure to behave more like conservatives on this issue. Think tanks, business leaders, and Tea Party groups are calling on them to restrain the growth of government spending. Republicans have switched from quietly going along with expansion to calling for retrenchment.
Public employees also stand on unfamiliar ground. Until recently, union leaders believed that the U.S. Constitution (the "contract clause" of which says that state laws may not "impair the Obligation of Contracts"), as well as many state constitutions and local ordinances, made public pensions sacrosanct. Their confidence is now being severely tested. While unions generally defend the current pension system and have staunchly opposed trimming benefits in most cases, they may be more open to change than people think. Recall that the purpose of unions is to advance the occupational interests of their members, and that includes doing what it takes to ensure them a more secure retirement.
When it comes to the generosity of pensions, unions' incentives to push for more are obvious. Yet, when it comes to pension funds' fiscal health, their motivations can go in two directions.
On the one hand, strong unions might want to ensure that plans are properly funded because their members will rely upon them in retirement -- especially since many public employees do not have Social Security to fall back on. Strong unions might then use their political muscle to ensure states fund their plans. The best example of this model is New York State, which has relatively well-funded pensions and the highest public-sector unionization rate in the country.
On the other hand, strong government unions might also produce the opposite result: underfunded pensions. Why? Stronger unions pressure politicians to agree to more substantial pensions, which increase budget pressures that in turn cause politicians to short the pension fund. In this scenario, unions push for fatter pensions and spend as little political capital as possible on the funding issue. Just look at Illinois, New Jersey, and California.
In short, public-pension funding presents union leaders with two plausible courses of action: confront the funding issue head-on to ensure that pensions remain solvent, even if benefits must be reduced, or focus their political energies on preserving pension generosity while skirting over the funding issue.
In the new circumstances, some unions may decide that they haven't been sufficiently attentive to the funding status of their members' plans, and that they need to cooperate with reformers to ensure that those benefits will be paid. Others may decide that they can hold the line, give as little ground to reformers as possible, and rely on existing statutory protections.
Where the unions end up will be hugely important to any successful effort to address the pension funding crisis. And that will depend, at least in many places, on the quality of state and local government. Political leadership will determine the amount of collective pain required to address this hugely pressing problem.
Daniel DiSalvo is an assistant professor of political science at the City College of New York-CUNY and a senior fellow at the Manhattan Institute.