Saturday, March 21, 2015

Pension Plan Reform: the First Step


Pension plan liabilities are loading states and cities all over the country with huge debt burdens but because of the sacrosanct nature of public service employee contracts, politicians can see no solution other than raising taxes on those who do not enjoy such generous pensions. A first step in reforming the pension systems would be to freeze benefits for all participants in the plans who are not covered by these sacred union contracts, and offer them 401k type defined contribution plans.

There is no contractual reason for elected officials, political appointees, and high paid non-union employees to continue in these plans. Removing them from participation will eliminate a real conflict of interest. How can there be significant pension reform until the legislators and political appointees who negotiated these generous union plans no longer share in the benefits and concessions they gave to the unions. 

My home state of Connecticut provides a good example of egregious excess in the distribution of pension benefits. Just last year Democratic Governor Dannell Malloy appointed two sixty-six year old Democratic operatives as judges on the State’s highest court. The two will be eligible to receive pensions of $100000 per year at age 70 after serving just four years on the bench. It takes approximately $2,500,000 earning 4% to provide an income of $100000 per year.

There was no union contract requiring this incredibly generous pension benefit. It has just been a traditional way to reward friends in high places. In this case, however, public outcry caused the Governor and the Legislature to act almost overnight and alter the pension benefit formula for future judicial appointees. Still, the damage had been done. During his first term the Governor added about a dozen Democratic lawyers to the State’s judiciary. All will enjoy extremely generous pensions after relatively short periods of employment.

The high paid administrators of Connecticut’s University system are also included in the State’s pension system even though they are not covered by union contracts. There is no sacrosanct contractual reason to provide football and basketball coaches whose total compensation exceeds $2,000,000 per year with pensions. Actually, in 2011 a study showed that the top ten pension recipients in the State were all associated with the University of Connecticut, especially its health center and medical school. They were all drawing pensions in excess of $200000 per year, with the highest being about $272000.

Finally, all elected state legislators and their staffs are included in the State’s pension system even though they are not covered by any union contract. It is true that legislators are considered part-time employees and only make about $35000 per year in salary. But there is a pot of gold at the end of their rainbow. During his first term Governor Malloy appointed a number of Democratic legislators to high paid positions in his administration.

These appointments will eventually double and perhaps even triple the pensions they would have received if they had stayed in the legislative branch. A good example is Andrew McDonald, a lawyer and political friend of the Governor’s from their hometown of Stamford. McDonald left the legislature to take a high paying job in Malloy’s new administration. He was subsequently elevated to the State’s Supreme Court where he will be eligible for a six-figure pension upon retirement. If he had stayed in the legislature his pension would have been a percentage of his $35000 salary.

How will it be possible to reform the State’s pension system when the people who are supposed to be representing the public share in all the benefits they confer on the unions? People regard these union contracts as sacred obligations but the legislators and their staffs knew they every concession they made in the past to the union negotiators would benefit themselves or their own family members.

They cannot be part of the pension liability solution as long as they are part of the problem.


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