Sunada: Local unfunded pension liability mirrors national problem

Nationwide, the United States has $1.49 trillion in unfunded liabilities from state pension plans.

Of this total, San Jose has an unfunded pension liability of $3.5 billion; that works out to $3,600 which every resident owes in future taxes or fees. I raised this issue with the four candidates running for election to the District 6 seat on the San Jose City Council — Michael Mulcahy, Olivia Navarro, Angelo Pasciuti and Alex Shoor.

At a public forum hosted by the San Jose Odd Fellows, a society for community enrichment, on Jan. 24, the candidates assembled to meet and greet the public. As an attendee, I asked them two questions:

• (1) Public-sector workers have a better retirement plan than private-sector workers. Do you consider this situation to be ethical?
• (2) Will you sponsor legislation to terminate pension benefits for future employees of the city? Future employees would receive only defined-contribution retirement plans like a 401K.

Almost all companies in the private sector do not offer defined-benefit retirement plans due to their excessive cost. If a retirement plan is available, it would be a defined-contribution plan like a 401K. It is subject to the whims of the market. If the value of assets in a 401K declines, the retiree eats the loss and may be forced to return to the labor market due to financial stress.

By contrast, if assets in a pension account decline in value, the government pumps tax revenue into the account to ensure that payouts to a public-sector retiree do not decline. Governments have an almost limitless source of money — taxes — to pump into pensions.

This arrangement is grossly unfair since the private sector generates the wealth that funds the operation of the public sector, not the other way around. So ethically speaking, the retirement benefits of the public sector must never be financially better than that of the private sector.

In this context, the candidates gave the following responses to my questions.

• Mulcahy: (1) non-answer response and (2) opposition to discontinuing pension benefits.
• Navarro: (1) morally okay for public sector to have better retirement plans than private sector and (2) opposition to discontinuing pension benefits.
• Pasciuti:  1) morally okay for public sector to have better retirement plans than private sector and (2) non-answer response. He earlier addressed my questions at a meet-and-greet at Cafe Rosalena.
• Shoor: (1) non-answer response and (2) non-answer response.

Their responses typify the attitude of politicians across the country in local or state governments and the national government. The politicians fear losing in the next election if they invoke the ire of public-sector unions by canceling pension plans for future employees.

At the same time, most voters are quite ignorant as occasional polls of voters’ awareness of current events suggest. The private sector dwarfs the public sector by quantity of voters, and voters in the private sector could successfully press the politicians to act, but will not do so due to ignorance of the pension liability problem. Hence, the politicians correctly judge that ignoring the pension liability problem is less electorally risky than fixing it, so they ignore it.

It will fester and manifest itself in rising taxes and diminishing government services, for which funding has been diverted to pension accounts. A diminished quality of life like that in Argentina may be the end result for us Americans. How much does Buenos Aires annually spend on pensions? About 12% of gross domestic product.

Dwight Sunada is a freelance writer and analyst and holds a Ph.D. in engineering from Stanford University.