February 3, 1976
Page 2072
GOVERNMENT PENSIONS
Mr. MUSKIE. Mr. President, I would like to call the Senate's attention to a speech made earlier this month by the Senator from Missouri (Mr. EAGLETON) on the subject of public employee pension programs.
Senator EAGLETON points out the growing burden that will have to be borne by State and local governments, and indeed by the Federal Government, if present trends are allowed to continue. The call for prompt attention to this problem and for a reassessment of pension funding is long overdue.
Mr. President, I ask unanimous consent that Senator EAGLETON's speech to the New York Society of Security Analysts be printed in the RECORD.
There being no objection, the speech was ordered to be printed in the RECORD, as follows :
THE CRISIS IN PUBLIC PENSION SYSTEMS
(By Senator THOMAS F. EAGLETON)
A financial time bomb is ticking away in the obscure inner reaches of government. As each day goes by, the staggering pension obligations of government — federal, state, and municipal — grow and become more burdensome. The point is at hand where governments must consider not only current pension obligations, but also future commitments as they will bear on the ability of governments to meet these obligations, remain viable entities, and not disrupt the national economy.
In recent months, much attention has been focused on the New York City crisis. No one event, no one condition, no one person brought New York City to its knees. Rather, a series of things and individuals interacted to bring about the crisis. One of these was the burgeoning stack of bills for New York City's retirement plans, the costs of which tripled in ten years' time.
The New York experience has moved me to examine this problem in other contexts, both nationally insofar as the U.S. government is concerned, and locally in the District of Columbia in my capacity as Chairman of the Senate D.C. Committee.
We are just beginning to discover the magnitude of the problem. Cities, states, and the federal government have set up a web of retirement obligations that could have negative consequences for our children's standard of living. For states and municipalities, retirement costs may, over the next quarter century, force choices between bankruptcy and crushing tax increases. On the federal level, the alternatives are more taxes on workers and investors, faster money growth, or the postponement of other claims on output such as those for energy, housing, and pollution control.
The national economic resources that we can draw on are limited — a little more plentiful perhaps if we manage the economy wisely,but nevertheless limited. We just cannot continue to increase public pension benefits as we have done and still expect to enjoy rising standards of living in the future. If we want governmental retirees to receive all of the benefits that they now expect, we will have to give up something somewhere along the line — today's consumer spending, tomorrow's consumer spending, capital investment for the nation's future — something must give. The choice will be made for us if we do not act. The problem will not go away, either. The cost of burying our heads in the sand today will be an even more devastating economic crunch in the years ahead.
Let me discuss briefly the status of the major public employee pension plans. There are approximately 2300 state, county, and municipal retirement programs in the country covering about 9 million workers. Then there are the two major federal retirement systems: civil service and military, covering roughly 7.5 million workers between them. The social security program, of course, also pays benefits to retired citizens. But that system is more one of income transfer than a true pension. The problems of the social security system, moreover, warrant a speech in themselves.
I already mentioned the growth in pension costs for New York City — the payments for retirement plans tripled in ten years. Retirement costs will continue to be a major component of the city's operating budget. New York City today is spending $1.2 billion annually on retirement programs, and even at that rate it would cost an additional $400 million to $700 million a year for full funding. By 1985 New York will have at least $3 billion in unfunded pension obligations.
New York is unfortunately not alone. Washington, D.C.. with a population a tenth that of New York, already has unfunded pension liabilities exceeding $1 billion. Los Angeles, and perhaps other cities as well, will reach that billion-dollar level in ten years.
The pinch in state and local pension systems is just beginning to be felt. Unlike the federal government, which has printing presses to run off enough money to meet its bills, state and local governments face constitutional requirements to operate on balanced budgets. With many jurisdictions experiencing erosion in their tax bases, needed public services may have to be cut in order to meet obligations to retirees.
Pension benefits are more likely to increase rather than decrease. Expansion in city services nationwide has resulted in a rapid increase in employment and payrolls. Between 1957 and 1972, state and local government employment grew three times as fast as private employment. When this past growth in public employment is coupled with the great improvement in real pension benefits that we have seen, the outlook is for serious difficulties for many state and local governments.
The problem will be particularly acute for older cities of the Northeast and Midwest with declining populations and expanding costs. According to a study by the American Enterprise Institute, full funding would require double the current rate of pension fund contributions under even the most optimistic assumptions.
Many cities have been virtually excluded from the municipal bond market. Interest rates paid by some still able to sell securities are at astronomical levels. Investors are clearly looking at these tremendous pension obligations looming up ahead as they contemplate the purchase of 20-year or 30-year bonds.
A few additional points are worth noting Big cities are losing population, and the residents who remain are demanding ever increasing levels of service. Higher local taxes are chasing away businesses and property owners. Regressive tax systems fail to produce expected revenues.
Where are these jurisdictions going to get the money to pay for police and fire salaries, when huge chunks of the budget are earmarked for retired policemen, firemen, teachers, sanitation workers, and the like? Investors will be reluctant to loan money under these circumstances. That leaves the federal government, which was the unwilling lender of last resort in New York's case.
But the federal government has been setting a bad example itself, and in so doing has made coping even more difficult for state and local governments. Since many state and local jurisdictions take into account salaries and benefits at the federal level, any action taken in Washington is echoed from coast to coast. So the federal government, while able to pay higher benefits itself, may be leading smaller units of government directly to its door.
The magnitude of the problem on the federal level is even more staggering, despite the obviously greater ability to meet pension costs. The civil service program is partially funded, yet still has an unfunded liability of $100 billion. Military personnel do not contribute to their retirement plan, and that system has $155 billion in unfunded obligations. Moreover, the federal government has been lax in assessing the impact of benefit improvements and the relaxation of eligibility requirements.
A pension benefit that has contributed significantly to the poor fiscal state of the funds has been the lowering of the retirement age. Civil Service employees can retire with a full pension after 30 years of service after they reach the age of 55. Military personnel can retire after 20 years of active duty, regardless of age. According to the Pentagon, the average military retiree can expect to receive in retirement pay an amount equal to more than twice the amount he received while on active duty. Where in the private sector can a worker retire with full benefits as such an early age?
Moreover, after retirement, civil servants may work in private industry long enough to entitle them to collect social security in addition to their pensions. In 1972 the Civil Service Commission discovered that over 40 percent of all civil service retirees received social security checks as well as their government pensions. Because military personnel contribute to social security, eventually they will receive two retirement checks and if they become civil servants or work in private industry after they retire from military, they could qualify for three pension checks.
Benefits paid under many of these pension plans are automatically increased with inflation, and this provision has contributed to the sharply rising costs. Federal civilian and military pensions are raised automatically when the consumer price index jumps three percent or more and remains up for three consecutive months. To make up for the purchasing power lost during the wait, an additional one percent increase — known as a 'kicker" — is tacked on to the pension.
According to various studies, the kicker actually results in overcompensation for inflation. Since 1966, price-related increases have raised pensions by 83 percent, while consumer prices have risen 63 percent. If the cost of living rises at six percent a year, the kicker will give the average retired serviceman a pension 19 percent higher than he needs to keep pace with price increases. The ability of these pension systems to keep up with or ahead of inflation has encouraged workers to retire earlier because their pensions will rise faster than their wages had they opted to continue working.
Another factor that is worrisome as we look toward the next century is the increasing number of retirees and the smaller number of persons entering the labor force. For the rest of this century a large work force resulting from the postwar baby boom will be able to produce benefits for the relatively small retired population. The low birth rate of the 1970's, however, means that when the baby boom era workers reach retirement ageafter the turn of the century, there will be a relatively small work force to provide high benefits for a large number of retirees, given the fact that so many of these retirement systems are not adequately funded.
Many funds are operated on a "pay-as-you-go" basis rather than being fully funded; some are completely unfunded.
Eligibility requirements have becomes less stringent, enabling more workers to receive pensions sooner.
Real pension benefits have been improving.Many pensions are increased as the cost of living goes up.
The number of retirees relative to the number of active workers is increasing.
State and local payrolls have been enlarged.
What can we do about the condition of our public pension systems? The problems are not going to disappear. Yet we do not want to act precipitately to jeopardize the security of our older citizens or to suggest to them that we are going to renege on benefits they have earned. Instead, we must develop a course of action that will place public pensions on a firm footing, and insure that pension promises made now will be honored in the future.
If we do not face up to the problem now, we are headed for trouble. Cities will be unable to meet their unfunded pension commitments without confiscatory taxes. States will have to begin assuming some of the pension burden from their cities. Even the federal government is not immune.
Even absent any inflationary impact, the federal retirement programs will find their annual costs quadrupled in 25 years. Unless the Gross National Product can be counted on to grow commensurately, very serious problems will develop. To pay currently required benefits to future retirees, federal taxes might have to be increased. That could put a heavy drain on the private economy. Alternatively, the government might decide to fund these programs by merely printing money. And the cost in terms of inflation would be great.
Somewhere the money will have to be found, and that may mean cutting into other areas of the federal budget. Let me illustrate what I mean: Each year when the defense budget comes up for review in the Senate, a number of us zero in on various military hardware items that we think are unnecessary and wasteful. We have taken on suchthings as the C3A plane, the MBT70 tank, the Safeguard antimissile missile, along with a number of other military boondoggles — and we have lost more of these battles than we have won. In the best of years we might slice a few hundred million dollars from the Pentagon's budget.
Those are the fights that get all the public attention, but the fact is that more than half of the $90 billion defense budget is locked in for personnel compensation — paychecks and pension checks — and are largely immune from such cuts. A recent study by the Brookings Institution concluded that the present system, left unchanged, will result in military pension benefits siphoning off funds from the defense budget that are essential for national security.
Unless we act now, in future years, the classic question of economic priorities could become "Guns or pensions?"
As new public employees are hired, there are some actions which could be taken to preserve our rising standards of living and to control the growth of pension costs. If benefit levels for pensions are not changed, then the retirement age could be raised. Some government pensions are payable as early as age 50. The practices of receiving multiple pension checks from different sources should be examined to see if the original intentions of government pensions and social security are being faithfully carried out. A number of other structural changes are possible, and I earlier enumerated some of them.
But there is a more fundamental reform that is urgently needed: fiscal discipline. We could go a long way toward addressing the pension problem if public officials, taxpayers, and public employees were shown the true costs and implications of the pension systems that are being put into place. It is too easy, I think, for a mayor or a governor or even the U.S. Congress to promise lavish future benefits, knowing that the credit will be accorded today while the bills will be paid by the next generation. A greater level of funding, requiring some of the future costs to be paid today as they are incurred, could impose the necessary discipline.
This year, for the first time, workers in private industry will have their pension benefits protected under ERISA, the Employee Retirement Income Security Act of 1974. The law mandates standards for vesting and funding of pension plans and provides for a system of reinsurance.
Public employees were not covered by ERISA, but a littlepublicized provision, Section 3031, bears on this issue. That section requires that a study be made of public pension plans by, among others, the Senate Labor Committee, of which I am a member. We have to report our recommendations to Congress no later than the end of this year. The study is mandated to include the adequacy of existing levels of participation, vesting, and financing; existing fiduciary standards; and the necessity for federal legislation or standards. As part of that study we should consider the possibility of having the federal government set standards for public as well as private pension plans.
The funding and disclosure requirements of ERISA are designed primarily to protect the employee. Similar requirements for public plans would impose a greater sense of fiscal accountability and be a major protection for the taxpayers. Full actuarial funding, as is required for private plans, may not be appropriate for public pension systems. But advance funding to provide a cushion against lean years of, say, ten years' retirement benefits, would be of tremendous value.
Some believe that because governments have the power to tax and the ability to raise money in the credit markets. funded pension systems are not necessary. I disagree. Reasonable advance funding requirements would insure that enough money will be in the fund to pay employees during their retirement. Advance funding makes the true cost of improved benefits felt immediately, creating fiscal responsibility. And such advance funding would reduce the cost to the taxpayer in the long run because part of the cost of benefits could be provided by investment earnings.
These are the general areas where changes must be made. But I have a few specific suggestions that should be implemented immediately. Before we can decide where to go on pensions, we must know where we are. And that is more difficult to determine than you might imagine.
An accountant can pick up the financial statement of a major corporation and know immediately when that enterprise is healthy or insolvent. Not so with the books and records of States and local governments, or the federal government for that matter. A key to this whole issue is good bookkeeping. Audits keyed to generally accepted accounting principles would show the magnitude of pension debt, the availability of resources, the reliability of revenue and expenditure estimates. The federal government can take the lead in this area, by putting its own books in order and by requiring the large state and local jurisdictions to submit to audits and SEC registration before they go to the bond markets.
Another thing we can do is start telling people that the well is running dry. We must say clearly: if pensions go up, then so do taxes.
Congress can ill afford to ignore the consequences. The magnitude of dollars involved in this pension business is staggering. Civil service and military retirement costs will, without inflation, go from $13 billion now to more than $50 billion by the year 2000. State and local pension plans are paying out $7 billion annually now and in a quarter century they could easily eclipse total active payrolls.
For too long, government at all levels has been quietly committing future generations to paying off enormous pension costs as though that were somehow an inevitable fact of modern life. The late Justice Felix Frankfurter once reminded us that, "There is no inevitability in history except as men make it so."
We have it in our power to — at the least — make a beginning in dealing with this problem. Ever growing unfunded pension obligations need not be "inevitable" if we commit ourselves now to assuring that this crushing burden of debt will not be a part of our legacy to our children, and our children's children.