Wisconsin Lie?

A defense of state workers in Wisconsin has been circulating in the last couple of days.  The gist of the argument is that the state does not contribute one penny to employee pensions–it all comes from the workers themselves.  This is nonsense, but interesting nonsense.  Let’s take a look at it.

The author, David Cay Johnston, alleges that because wages are part of the total collective bargaining agreement, and that workers choose to defer part of their compensation to the future, taxpayers pay zero toward pensions.  Does he mean that workers do not factor in the amount they expect to contribute to their pensions into their bargaining?  That would be strange, now, wouldn’t it?

If, as Johnston argues, this is just a decision about how much of one’s salary to put aside for the future, then why is it an issue at all?  After all, Scott Walker, the governor, is just asking them to accept less in take-home pay and put more into their pension fund. The total is the same, right?  That is not a “pay cut,” as he alleges.

Oh, it doesn’t work that way?  So if pensions are underfunded, a fact no one denies, then the increased contributions to make up the difference should come from…somebody else.  That wouldn’t happen to be taxpayers, would it?

He further claims that Wisconsin workers are being asked to take a “pay cut” so that “the state of Wisconsin can use the money to fill the hole left by tax cuts and reduced audits of corporations in Wisconsin.”  For all his ranting about journalists’ responsibility to provide a full context and get the facts straight, this is the height of hypocrisy.  The implication is that our tax problems are caused solely by tax breaks (no doubt to the rich) and those horrible tax-dodging corporations.  Countless respectable people believe quite the opposite–that not enough tax breaks and parasitism towards business are the culprits.  Playing by his own rules would require Johnston to acknowledge that.

Workers do not want to put enough in to fund the system from what they take home now and would rather have taxpayers foot the bill when it comes due.  They are not bad people for wanting more.  They are doing what most human beings do–enjoying the power they have.  In this case, they have that power because the rules of negotiation are crooked.

Johnston knows this perfectly well, I’ll wager.  One of his defenders, Rick Ungar, was forced to admit as much as commenters to his blog objected to this sophistry.

Because the pension plan is a defined benefit plan – requiring the state to pay the agreed benefit for however long the employee may live in retirement- if the employee lives longer than the actuarial plan anticipated, the taxpayer is on the hook for the pay-outs during the longer life.

Ungar quickly covers by saying that this is not the problem it seems, since:

…if the market continues to perform as it has been performing this past year, don’t be surprised if the funding crisis begins to recede. If it does, what will you say then?

Well, Rick, I will say that OJ didn’t do it and all dogs go to heaven.

For all my disgust with Johnston and Ungar, I will give them one thing.  They know who really caused all this–the state itself.  The state pension systems are broken.  At some point, probably sooner than expected, no one is going to get anything.  Our elected officials have put us on the hook for schemes they know full well can’t work.  By giving state workers what they want instead of what they can reasonably have, they have ensured that many good people will retire, and die, poor.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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4 Responses to Wisconsin Lie?

  1. Professor, you conflate issues.

    The basic economic issue I wrote about is unassailable — compensation is earned, every cent of it. Were it not earned a serious crime would be taking place, gifts of taxpayer funds.

    That the main Wisconsin pension fund may be underfunded — I say may because the state’s official reports do not paint the dire picture you do, though as I have written a look at just the average balance suggests underfunding.

    But THAT is a separate issue. And that is an issue about whether management tried to get a FREE LUNCH (title of my last book) by not putting enough money into the plan each year.

    You seem to blame the workers that the state did not put enough money into the plans each year (and I suppose you would blame them for poor investment decisions, based on your post.) Who controls the fund? Who negotiated on the other side of the table? Who manages the investments? Who decided to buy volatile rather than less volatile investments? Answer: not the workers, but former administrations and legislatures (in terms of the annual appropriations).

    The annual accrued benefit is a number calculated for every worker in Erisa defined benefit plans. It is, as you know, not a mystery, but a defined figure.

    Defined benefit pensions are an inherently sound concept, as shown by the fact that you can go buy its individual equivalent, an annuity any day of the week.

    What you seem to be concerned about is not a pricing of labor issue, but a mispricing of the future obligation by politicians, who cheated the taxpayers by delaying the annual duty to obligations they committed to.

    Or do you think that 1) pensions costs cannot be reliably calculated and 2) management bears no obligation to fulfill its contracts? I doubt you do, but I want to encourage you to step back from the mechanics and think through the principles, which as academics we should always do.

    My column at tax.com did not argue that the workers were paid too much or too little. It was about understanding the economics and a statememt, widely assumed by journalists to be factual that journalists failed to check out.

    If an employer (like me) hires someone and agrees to a compensation package and then fails to proper set aside money for the portions that are not paid every week or so (like vacations, bonuses and pension benefits) is that the fault of the workers or the employer? What does the law say about paying you these benefits? And what principles underlie this? You will find learning the history of Erisa, including the railroad workers and Studebaker, to be instructive.

    Yes at the end of the day this may be awful for taxpayers (as are many things I have exposed for years that government does to taxpayers). And yes the workers may have to take pay cuts going forward — which, by the way, they agreed to do already.

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    • Terry Noel says:

      David,

      Thank you for your response. I want to be fair here, so let me see if I can follow your reasoning. In your first paragraph, you state that every cent is earned, otherwise it would be a crime. That is not entirely accurate, as wages are set through enforced collective bargaining, not the free market. The wage set in a free market could be said to be earned. As it is, the wage is at least partly coerced, effectively making it a rent.

      Directly after that, you claim that management, which I take to be the state, is seeking a free lunch. I believe I made that point clearly. My blog tomorrow will deal more directly with that issue. For now, let me say that it is the state governments who are rent-seeking–on that we can agree. The unions are as well, as noted above.

      Your fourth paragraph is an excellent argument for defined contribution plans as opposed to defined benefit plans. Trusting the state to invest wisely on one’s behalf is like asking the fox to guard the hen house. Each of us is ultimately responsible for our financial future and should learn how to manage finances wisely. In fact, I am puzzled how you can say one moment that former administrators and legislators invested poorly, and then turn around to say that defined benefit plans are sound.

      The argument that defined benefits are sound because one can buy annuities is a non-sequitur. One can buy Lotto tickets as well, yet I doubt you would call them a sound investment strategy. In the end, businesses that generate wealth are the foundation of all such plans. If sufficient wealth is not created to pay future obligations, they do not get paid just by calling them “defined,” Erisa notwithstanding.

      I do not blame the workers except perhaps for being naive. I do blame the state and the unions, who use corrupt laws to line their pockets at the expense of both workers and taxpayers.

      Terry

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  2. I think you are still letting your political views interfere with your thinking about economics and leal principles.

    You can like or dislike unions, but in this case there is a contracted agreement reached by both sides. There was no coercion here, just negotiation. (Have you ever negotiated a contract?) Unions are lawful. And there are lots of ways in which companies bargain collectively, that is, as if they were unions. There is nothing inherently wrong with collective bargaining.

    And since you can buy a pension in the private market there is no reason to disrespect the concept of a defined benefit. You would shift risks to those lacking the skill to invest (specialization, Adam Smith and all that). So, hey, why not have people operate on themselves instead of having health insurance? The principle you espouse would be the same – the workers can do it better for themselves.

    The fact that this fund MAY have been badly invested is a political matter about the quality of the officials we elect and their integrity. Perhaps the problem is a paucity of law holding fiduciaries accountable.

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  3. Terry Noel says:

    The more we exchange, the more I think we fundamentally agree on at least some issues. I have negotiated contracts, in fact. I did so with or for parties who were completely voluntary participants. Had either side wished to walk away and deal with someone else, they could. Not so with unions. You are correct to point out that they are legal. My point is that they are the result of bad laws–ones that should be changed.

    I have also taught labor relations, though it has been a while. I am afraid I do not quite follow your point about companies bargaining like unions. Yes, they try to leverage whatever bargaining power they have, but unlike unions, no one is forced to deal with them. Perhaps I misunderstand you on this one.

    On the matter of investing, I would indeed operate on myself if I were the most qualified person around. Thankfully, I am usually not. Individual investors can and should get advice from experts. They should not, however, rely blindly on such advice. As with medical care, they should be active participants in the decision process.

    A point on which we can agree fully is your last. It is the states that have tried to pull a fast one. The federal government has as well. We citizens of various states and the nation as a whole need to be more vigilant.

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