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Too Big Not to Fail: Public Pensions and the Cost of Government

by christina disomma / /

As National Employee Freedom Week continues, it’s worth taking a look at the organizations that accounted for 7.5 million union memberships last year: public sector employee unions. 

Despite recent declines, public-sector unions still have a membership rate of more than 35% (more than five times the rate for private-sector unions). Those high membership rates aren’t a coincidence. State and local public employees with a union membership received on average $14 more per hour in wages and benefits than non-union members. 

The gap is especially exaggerated when it comes to “defined-benefit” contribution retirement plans. These plans tend to become very expensive, because there is no truly accurate way to predict how long workers will live and how their incomes will rise before retirement. As wages rise and workers begin to live longer after retirement, these plans become more and more expensive, and can produce disastrous budget shortfalls. Naturally, all that extra cost has to go somewhere, and the burden lands almost always directly on the taxpayers.

According to the 2012 State Debt Report put together by the non-partisan State Budget Solutions, more than half of total state debt in 2010 (the most recent set of published data) consisted solely of unfunded pension liabilities, to the tune of $2.8 trillion. In some states, the percentage is even higher. California’s pension liability far outstrips its outstanding state debt, at more than three times the size. Illinois’ problem is even more exaggerated: the state has $32 billion in outstanding debt, but its pension liability comprises a staggering $192 billion. Large cities can face a similar problem, albeit on a smaller scale. The Beacon Hill Institute estimates that in FY2013, Los Angeles will spend 32 cents of every total payroll dollar on public-worker pensions. Unfortunately, only 9 cents of every payroll dollar will be contributed to the program by employees - leaving the city on the hook for a considerable chunk of change.

It is true that states have many fiscal challenges beyond those caused by public employee unions. Yet, it is overwhelmingly clear that public-sector unions are driving up costs for government at all levels (and thus, taxpayers). 

In Los Angeles, for instance, every percentage point increase in public-union membership creates $78 more in debt per capita. It should be left to the individual to decide whether union membership is right for them, and to the membership base to decide if the unions should exist at all. States, though, are soon going to have to make a decision about whether a fully-unionized employee pool is affordable.